Schroders Commentary
The escalation of conflict involving the US, Israel, and Iran over the weekend has created significant disruption and uncertainty in global financial markets, with multiple critical developments unfolding. While it is inevitable that broader equity and fixed income markets will suffer weakness, going into the conflict, the energy equity sector had a few supportive elements on its side:
a) Most investors are underweight energy in their portfolios, with many having a zero-weight position right now. This is reflected in the weight of energy in the broader MSCI ACWI being at just 3.5% and the lowest level in the last four decades.
b) The fundamental outlook for oil, gas and power markets is positive. Pre any supply disruption, oil markets are balanced; and as a result of over a decade of underinvestment, the sector needs to go through a reinvestment phase.
c) In addition, driven by an extraordinary period of required growth in power generation, consumption rates for natural gas are growing at a pace of two to three times faster than historical rates over the next decade.
d) The lack of reinvestment in both oil and gas markets is matched by high dividend yields and share buyback yields being returned to shareholders.
e) Despite these attractive yields being supported by strong free cash generation the sector continues to trade at a significant discount to the broader market.
Mark Lacey, Head of Thematic Equities at Schroders