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Overview
The global natural gas crunch is adding a tailwind to energy stocks just as relatively low valuations improve their appeal. The outperformance this year against the broad stock market could extend given where oil prices are.
The MSCI ACWI/Energy Index rose 25% YTD amid crude’s surge, beating a 13% advance for the MSCI ACWI Index. Now, the gas rally is boosting the potential for higher energy prices in the final quarter as demand for alternatives like diesel and coal increases. Oil is already getting an extra lift, with OPEC seeing a tighter crude market. This in turn should benefit energy shares.
Chart 11: Energy stocks have room to catch up (Index 1/1/20=100)
Source: Bloomberg
Emerging-market stocks can’t expect much respite from what has already been a rough few months.
We’ve had a slew of central banks from developing economies set their monetary policies this week and one thing that’s clear is that those that have gone ahead and hiked amid rising inflation threats have been punished in the equity space. In Brazil, the Ibovespa is now the worst-performing major stock market globally after China this quarter as the central bank carried on with the world’s most-aggressive tightening cycle. Similarly, South Korea’s Kospi index is among the laggards after becoming the first major Asian economy to raise rates.
Chart 12: EM equities still struggling
Source: Bloomberg
The decision to taper bond purchases by the US Federal Reserve may have jump-started a rise in global bond yields again but not in a way that’s likely to change the indifferent performance of the world’s value shares.
The economically-sensitive value cohort is failing to react as it did when yields pushed higher earlier this year, a good sign of the shift in investor expectations toward growth. In fact it’s probably a good a gauge as any of stagflation-like fears in the stock market. That is, lower growth but with higher-than-normal inflation for a period of time.
Chart 13: Value vs Growth has not rebounded as strongly as Cyclicals v Defensives
Source: Bloomberg
