April 19, 2010
Global Equity Strategy
Buy Energy, Sell Materials
We are upgrading Energy to overweight and
downgrading Materials to neutral. We have been
tactically cautious on Energy. Our concern was that
earnings risks – primarily an oversupplied US natural
gas market and refining margin pressures – were
underappreciated. We think this has changed.
We think sector-specific and macroeconomic
factors are now more supportive for Energy than for
Materials. Oil price fundamentals are improving and
should continue to firm heading into 2H10. There is a
large differential between spot, the forward curve, and
the oil price embedded in earnings expectations. Also,
macro factors – a peak in growth momentum, rate
tightening cycle – have historically supported relative
outperformance.
Our upgrade is an earnings call. Energy multiples
are more likely to compress than expand. Valuation
appeal is more regional and industry specific rather than
sector specific. Within Oil & Gas we like the super
majors in Europe (Total, BP), where they are cheaper
than their US counterparts and are supported by a
strong currency tailwind. We like the mini majors in the
US (Hess Corp, Occidental Petroleum) where there is
greater leverage to the oil price. Within Oil Services, our
preference is primarily in the US, where we stick with the
large-cap players (Schlumberger, Weatherford, Saipem)
while in E&P we like Woodside, Noble, and Tullow.
We are taking profits on Materials. We are concerned
that: 1) value is already hard to find; 2) earnings already
incorporate a return to (close to) peak levels for many
commodities; 3) earnings momentum is fading; 4) the
market has already become more discerning on stock
selection; 5) continued Chinese policy tightening and
recent measures to rein in property prices have the
potential to dampen sentiment towards the commodity
related sectors; and 6) there may be tax changes in
Australia – possible introdu