Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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An energy renaissance as post Covid-19 world gets priced in
Peter Garnry
Chief Investment Strategist
Summary: Energy stocks rose 5% against the global equity market yesterday extending the massive rally since November 8 when Pfizer announced its Covid-19 vaccine. Yesterday, energy stocks rose on better than expected US November PMI figures and the likelihood that Biden picks former Fed Chair Yellen as new US Treasury Secretary which could set the US up for much more stimulus in 2021 lifting economic growth.
The global energy sector was up 5% relative to the global equity market yesterday driven by a combination of factors from a new Covid-19 vaccine from AstraZeneca, better than expected November PMI figures in the US, and the rumour that former Fed Chair Janet Yellen is Biden’s pick for a new US Treasury Secretary. Since the market got the first Covid-19 vaccine news from Pfizer on November 8, 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 recognizing 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 shown before in the chart below, 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.
The new Covid-19 vaccine from AstraZeneca which can be stored at refrigerator temperatures for much longer than the Pfizer and Moderna mRNA vaccines, which means that distribution will be much faster and 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.
If Yellen becomes the new US Treasury Secretary then 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. But nevertheless, the market is currently betting on it and energy stocks are a natural extension of this bet. The table below shows the 20 largest energy companies available on Saxo’s trading platform.
| Name | Market Cap | Price:D-1 | P/E | Total Return YTD | Total Return:Y-5 |
| CHEVRON CORP | 175,234 | 91.03 | 87.24 | -20.21 | 25.38 |
| EXXON MOBIL CORP | 166,423 | 39.36 | -39.09 | -37.88 | |
| ROYAL DUTCH SHELL PLC-A SHS | 133,327 | 1299.00 | -38.96 | 9.05 | |
| TOTAL SE | 113,790 | 36.12 | -20.80 | 5.47 | |
| PETROCHINA CO LTD-H | 112,983 | 2.58 | 21.72 | -29.27 | -45.50 |
| CHINA PETROLEUM & CHEMICAL-H | 72,587 | 3.54 | 9.53 | -17.90 | -1.10 |
| BP PLC | 68,690 | 253.45 | -41.96 | -6.64 | |
| ENBRIDGE INC | 60,887 | 39.18 | 16.64 | -18.39 | 7.42 |
| CNOOC LTD | 52,873 | 9.18 | 8.48 | -23.92 | 40.23 |
| CHINA SHENHUA ENERGY CO-H | 52,509 | 14.80 | 6.69 | 0.45 | 75.49 |
| EQUINOR ASA | 51,221 | 141.25 | -15.69 | 34.41 | |
| NESTE OYJ | 50,692 | 55.50 | 25.93 | 83.48 | 657.70 |
| CONOCOPHILLIPS | 45,612 | 42.71 | -31.65 | -8.92 | |
| ENTERPRISE PRODUCTS PARTNERS | 43,134 | 19.76 | 9.76 | -23.10 | 9.00 |
| TC ENERGY CORP | 41,250 | 57.19 | 13.35 | -13.78 | 67.56 |
| ENI SPA | 35,946 | 8.33 | -35.76 | -25.50 | |
| KINDER MORGAN INC | 33,097 | 14.62 | 16.36 | -25.93 | -23.61 |
| SCHLUMBERGER LTD | 30,082 | 21.61 | 47.36 | -44.73 | -66.57 |
| EOG RESOURCES INC | 29,391 | 50.38 | 23.80 | -38.00 | -34.96 |
| PHILLIPS 66 | 28,759 | 65.84 | 73.67 | -37.80 | -14.48 |
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