Often it is those which are least loved which offer the best opportunities, according to Michelle McGrade Chief Investment Officer at TD Direct Investing.
Energy and natural resources have endured a torrid time in terms of performance, although in a historical context the “low” oil price is actually back close to its long-term trend. Improved supply and demand fundamentals that form part of the normal cycle could mean the only way from here is up.
Past performance is not a reliable indicator of future results
Source: Bloomberg/NYMEX
Commentators have debated how much we can read into the correlation between the oil price and equity markets, but over the long term any link has been volatile and difficult to predict. It is probably better to look at the fundamentals of the energy sector itself than to try and guess how markets will react.
Reasons to be positive
Guinness Asset Management, which runs the Guinness Global Energy fund, expects the oil price to remain volatile for the next few months while the market remains oversupplied. After a turbulent 2015 for the energy sector, Guinness sees some reasons to be more positive in 2016. Demand for oil is expected to continue to grow while, against that, supply will eventually reduce towards more “normal” levels. Energy stocks have now underperformed the broad market for longer than they did after any of the large price declines since 1970. This is not a situation that is sustainable, in Guinness’s view.
A good entry point
While oil prices may fall yet lower in the near term, in the medium term Guinness expects a recovery to around $70 to $80 a barrel when the market rebalances. This suggests now could be a good time to invest in the oil and energy sector.
These are the views of Guinness Asset Management and do not represent TD Direct Investing.
Find out more about the Guinness Global Energy fund which is on our Recommended Funds list. Our latest quarterly update for the list is available now.
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