Energy renaissance as post COVID-19 world gets priced in
Energy stocks are rising against the global equity market, extending the massive rally since 8 November when Pfizer announced its COVID-19 vaccine writes Peter Garnry, Head of Equity Strategy at Saxo Bank.
On Monday, energy stocks rose on better than expected US November PMI figures.
Since the market got the first COVID-19 vaccine news from Pfizer on 8 November, energy stocks have outperformed global equities by 24% underscoring investors are positioning themselves for a normalisation in 2021.
Brent crude has also moved into backwardation, suggesting oil markets are normalising which could mean both higher prices and higher volume.
Before we get too carried away about the outlook, it is worth recognising the fact that work-from-home and flexible work hours could still cause a more permanent reduction in oil demand, and the transition to electric vehicles will also add headwinds over the coming years. But as we have seen before, the energy sector’s underperformance relative to the global equity market has been massive – down 76% since the peak in 2008.
This underperformance combined with low equity valuation could make energy stocks the best segment in global equities in 2021.
Vaccine good for energy
The new COVID-19 vaccine from AstraZeneca can be stored at refrigerator temperatures for much longer than the Pfizer and Moderna mRNA vaccines, which means that distribution will be much faster, thus the market is discounting a faster path to normalisation. This is good for energy no matter what and could prove a catalyst over the coming months.
With Yellen becoming the new US Treasury Secretary, we have the potential setup for a much tighter link between fiscal and monetary policy in the US and effectively it is a move closer to the absolute loss of central bank independence.
Yellen has focused her academia career on labour issues and inequality, and such her reign as treasurer could lead to more focus on full employment through fiscal measures with central banks asked to facilitate these policies.
The Republicans still control the US senate, although the special senate election in Georgia in January could change that, and as such it is still uncertain whether Biden and Yellen can deliver big fiscal impulse to the US economy. Nevertheless, the market is currently betting on it and energy stocks are a natural extension of this bet.