Following investment themes can be rewarding – if you get the timing right. Investing in the mega-cap technology names a couple of years ago is one example that would have been very fruitful. Are there other themes that are worth looking at right now?
We are in something of an inflationary boom, with inflation higher than expected, and growth in the US better than anticipated. The US market is moving from being focused on just a handful of stocks, the Magnificent 7, to a much broader market where other sectors are starting to shine. One such sector is Energy.
The Energy sector has outperformed both tech and the S&P since the COVID bottom, which you can observe in the chart below. The Energy ETF (XLE) has soared 385% since March 2020, beating both the S&P 500 ETF (SPY) and the Technology ETF (XLK) by a wide margin.
Source: Mauldin Economics
Despite the forces of the green energy transition, much of the world will continue to run on oil and gas for decades to come. Global oil demand is not likely to peak until 2030, and production has not kept up. We appear to be in a late-cycle commodity rally, and we are seeing it in metals like copper, which is often thought of as a trendsetter.
Investing in energy can also serve as a geopolitical hedge. International tensions remain elevated, and energy prices could spike if supply is severely interrupted.
In developed countries, strict environmental regulations inhibit new investment and sometimes force the closure of existing coal plants. This could create a substantial void, as coal still accounts for a high percentage of energy consumption in many countries. Natural gas can take its place, as it is cheaper and cleaner than coal.
Commodities, particularly energy commodities, deserve a place in portfolios. So do metals, addressed in previous QBs.
Source: Bloomberg
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