Contrarian opportunity: Energy
Most investors accept that the potential for higher returns comes with higher risk, and energy is a case in point.
The European sector was a top performer in Q1 2021, made a sharp turn in Q2 and has (until recently) been the bottom performer this quarter to date.
During the recent period of underperformance, earnings forecasts have continued to rise in response to higher crude oil prices this year and a still-restricted supply response, leaving the sector significantly derated.
From here, the sector can help those looking for positive sensitivity to inflation, strong earnings sentiment and extreme valuation lows.
Energy is widely used to position an economic outlook and was an important part of the reflation trade earlier in 2021; there are signs this trade could return.
Energy ETFs saw the highest level of net inflows among European sector ETFs last month as well as year to date.
As with the real estate and healthcare sectors, energy is also a large underweight position on average across institutional investor portfolios.
For energy, a large part of its unpopularity is its responsibility for carbon emissions and the necessity to reduce them and consider climate change.
European oil and gas companies have been quicker to respond than their international counterparts.
We are a long way from acknowledgment of climate change by major players to transition, but the majors have the technical knowledge, logistical and geographic reach to help deliver solutions needed to help affect change.
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