The Energy Sector’s Stock Market Lesson, According to Fisher Investments UK

Fisher Investments UK’s research shows markets look forward – but not too close or far ahead. What does this mean in practise? We think a look at Energy sector performance over the past couple years – and what commentators we follow said about its prospects – may prove enlightening.

We have found the next 3 to 30 months or so is the timeframe equities generally focus on most. Why? We think markets are efficient discounters of widely known information. Events likely to occur within the next three months – be it corporate earnings releases, economic data, political developments, etc. – get heaps of attention in advance. In Fisher Investments UK’s experience, all of the chatter – which includes forecasts, opinion pieces and other such things – gets reflected in equity prices quite quickly, as it influences investors’ expectations and trading decisions. That suggests to us these near-term issues very quickly lose surprise power over markets.

As for the longer end, equities entitle holders to a share of their companies’ future earnings, which is why investors own them, in our view – and hence, what markets continually evaluate. But beyond about 30 months, we think any number of unforeseeable variables can arise, making it impossible to assign probabilities to outcomes. Our research shows markets move most on probabilities, not possibilities, which makes focussing on distant possibilities unproductive. A decade or more out, a business or industry trends could change radically. For example, at the Information Age’s inception, few understood just how much the Internet or smartphones would remake the economic landscape – much less when that would happen.

Hence, we think investors likely benefit from decisions that rest on two main questions. One, what are equities’ principal earnings drivers over that 3 – 30 month timeframe? Identifying these factors allows investors to estimate probable trends in companies’ profits. Two, based on those drivers, how are future earnings likely to evolve in the next 3 – 30 months against what is already well known and therefore likely priced? We think that largely determines equities’ longer-term direction. Information outside those realms has little impact on equities, in Fisher Investments UK’s view.

To help illustrate markets’ capacity to filter out extraneous noise, we think it is worth considering how the energy sector has overcome past prognostications about its distant future. In 1962, oil-industry geologist M. King Hubbert famously predicted the world would hit “peak” oil production in 2000, after which it would enter a terminal decline.[i] That forecast proved incorrect: in 2000, world crude oil production rose above 70 million barrels per day.[ii] Less than two decades later, global production was over 84 million – 20% higher.[iii] Since Hubbert’s analysis, there have been myriad estimates predicting peak world oil production – most have been off, too.[iv]

For instance, many commentators Fisher Investments UK’s followed in the mid-2000s claimed peak oil production was still at hand, which would lead to energy firms’ struggles. There was a stretch from 2005 to 2011 where it seemed as if global oil production had plateaued around 75 million barrels per day.[v] Yet from 2005 to 2011, energy equities broadly outperformed the MSCI World Index, confounding commentators’ earlier suppositions.[vi] After seemingly plateauing, oil production picked up – driven by America’s shale oil revolution, which used hydraulic fracturing and horizontal drilling techniques to extract fossil fuels from shale rock formations and significantly boost output.[vii]

However, that eventually caused global supply – buoyed by American production – to outpace demand, causing 2014 – 2016’s oil price crash.[viii] Instead of peak oil supply, commentators we read seemingly switched to a peak oil demand narrative – production may be plentiful, the story went, but consumption was in a long-term downswing, never to recover. The energy sector substantially underperformed global equities from 2014 through 2020.[ix]

But today it seems clear to us concerns about peak oil demand dooming energy equities were either premature or just outright wrong. Energy has been by far the best performing sector since 2020 ended, returning 133.9% versus the MSCI World Index’s 15.2%.[x] The energy sector’s earnings depend mainly on oil prices, based on our analysis. As those soared when global demand gained steam with reopening – along with attendant supply-chain bottlenecks and Russia’s war in Ukraine – so did equities geared toward them, in Fisher Investments UK’s view.[xi] We think this was largely unexpected – oil prices’ positive surprise on energy’s earnings boosted the sector’s returns considerably.

Whilst this was a review of just one sector – not telling of its future – we think the retrospective provides a clear example and approach to portfolio positioning generally. When evaluating equity positions, there is often a lot of information to sift through, in our experience. Fisher Investments UK thinks concentrating on equities’ likely earnings prospects over a 3 – 30 month timeframe compared to expectations can help usefully separate the wheat from the chaff.

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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] “Energy Resources,” M. King Hubbert, National Academy of Sciences, 1962.

[ii] Source: FactSet, as of 9/6/2022. World crude oil production, November 2000 – November 2018.

[iii] Ibid.

[iv] “When Will World Oil Production Peak?” Guy Caruso, US Energy Information Administration, 13/6/2005.

[v] Source: FactSet, as of 9/6/2022. World crude oil production, May 2005 – September 2011.

[vi] Ibid. Statement based on MSCI World Energy and World Indexes returns with net dividends, 31/12/2004 – 31/12/2011.

[vii] “The Shale Revolution,” David Wethe, Bloomberg, 27/12/2019. Accessed via the Internet Archive.

[viii] Source: FactSet, as of 9/6/2022. Brent crude oil price per barrel, 2/9/2014 – 20/1/2016.

[ix] Ibid. Statement based on MSCI World Energy and World Indexes returns with net dividends, 31/12/2013 – 31/12/2020.

[x] Ibid. Statement based on MSCI World Energy and World Indexes returns with net dividends, 31/12/2020 – 8/6/2022.

[xi] Ibid. Brent crude oil price per barrel, 21/4/2020 – 8/3/2022.