On a day when one of our preferred stocks, Exxon, has hit the highest price since last June following an upgrade from Credit Suisse which upped its price target for the energy giant to $62 from $52, the energy sector has seen further tailwinds from none other than Goldman, whose strategist Alessio Rizzi writes that the bank continues "to have a pro-cyclical tilt in our asset allocation" and following the poor performance of energy stocks in the past year, the bank thinks that "adding energy equity exposure is attractive at this juncture, especially considering our constructive commodity view."
To justify its bullish bias, Rizzi writes that since the start of the year, "markets have been risk-on and cross-asset performance has repriced the potential for reflation" which is in line with Goldman's core views as it expects "pro-cyclical assets to outperform, supported by strong global growth and broadly dovish policy from central banks. Our US economists revised up 2021 US GDP growth to 6.8% given the increased chance of a large US fiscal stimulus package and pulled forward the first Fed policy hike to 1H 2024."
This is most clearly seen in the ongoing surge in oil prices which are now back to their pre-covid levels.
And while commodities have clearly benefited the most during this reflationary shift and Energy is now the best performing asset YTD...
.... many energy related assets have lagged during the strong commodities rally, especially over the last month perhaps due to ongoing concerns that regulatory intervention will shift the goalposts in favor of clean energ. In fact, Goldman notes that energy related FX and the US energy equity sector are almost unchanged since mid January, while the European energy sector sold off and USD Energy HY spreads widened vs HY.
And while US energy stocks have also lagged, Rizzi notes that across energy related assets, the EU energy sector lagged the most with performance of the SXEP lagging beta implied return by Brent by more than 2SDs.
The gap is even larger based on excess market returns: according to Goldman, Energy FX and US Energy Credit lagged as well but the underperformance was less extreme. The energy sector divergence to oil price looks large even though some of the underperformance of energy related assets might have been due to the poor earnings season for energy stocks and tighter supply (a more direct tailwind for commodity prices). For example, Energy equity and Energy FX are still well below the peak reached in 2019.
Goldman reinforces the bullish case by running a backtest on historical dislocations between the EU Energy sector and Brent and finds that based on data since 2010, when the EU Energy sector lags Brent performance by 2SDs, the EU energy equity sector tends to outperform its beta to oil price in the subsequent month. Related: Hedge Funds Flocked To WTI Crude Ahead Of Texas Cold Snap
In the end, perhaps prompted by JPM's recent thesis that an oil supercycle has arrived coupled with growing reflationary bets, investors have already positioned for a catch up of SXEP with options given the elevated level of Energy vol (~1.8x times SX5E vol) and call skew now in positive territory.
And as European energy braces for a gamma squeeze, we expect a similar bullish positioning among US energy stocks to follow.
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