The energy and materials sectors might struggle the next few years as inflation and aggressive interest-rate hikes lead to a sharp global slowdown, warned an economist at Capital Economics.
The S&P GSCI energy spot index
SPGSEN,
which tracks prices for oil and its derivatives, peaked on June 9. While it still trades over 40% higher year-to-date, it’s down by 17% since its peak. Industrial metals have also retreated from their peak by around the same amount, noted Oliver Allen, senior markets economist at Capital Economics, in a Tuesday client note.
SOURCE: REFINITIV, BLOOMBERG, CAPITAL ECONOMICS
That doesn’t spell good news for the energy and materials sectors.
“Although we doubt that they will fare quite as badly as they have in recent weeks, we still expect the energy and materials sectors of global stock markets to underperform over the next couple of years,” Allen wrote. “Worries that high inflation, and the large interest rate hikes required to tackle it, will lead to a sharp global slowdown have sent the prices of industrial commodities crashing down to earth in recent weeks.”
Earlier this month, growing recession fears and a drop in energy demand led to a slump that sent the U.S. crude benchmark back below $100 a barrel and into a bear market. Oil rebounded Monday after Saudi Arabia, the world’s top crude oil exporter, signaled it wasn’t prepared to significantly boost output following President Joe Biden’s visit late last week, but were back under pressure during Tuesday’s session.
West Texas Intermediate crude for August delivery
CL00,
CLQ22,
fell 0.9%, to $99.80 a barrel on the New York Mercantile Exchange on Wednesday morning, while global benchmark September Brent crude
BRN00,
BRNU22,
lost 0.4%, to trade at $106.97 a barrel on ICE Futures Europe.
Energy stocks are highly correlated to the price of energy commodities, and of oil in particular. As oil soared over the first half of the year, hitting 14-year highs in March, the energy sector also rallied. It remains the top performing sector in the S&P 500 with a year-to-date gain of nearly 30% but has pulled back more than 21% from its peak. The S&P 500
SPX,
is down around 17.6% for the year to date.
Indeed, high correlation to crude oil prices can be a double-edged sword, as energy stocks have underperformed…
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