The invasion Ukraine by the Russian military has shaken the energy and raw materials sector. The Texas oil barrel has risen by 50% this year and is already at 110 dollars. And natural gas has risen by 120% in the last week alone, due to the worsening of the war. Coal prices have also skyrocketed.
This increase in the cost of major fossil fuels will fall into the pockets of European families. The European Union is highly energy dependent and has few advantages. Still, the rally in oil and gas offers a investment opportunities in times of maximum uncertainty in equities and where the big challenge is to beat inflation.
The way to play the commitment to the energy sector is diverse. There are specialized investment funds, or heavily invested in companies of this category. There is also the possibility of investing through listed funds that are listed in industries that have very low commissions. Or exchange-traded funds that repeat the development of commodities (something that requires a lot of specialization), or even buy shares of companies.
Víctor Alvargonzález, partner and director of strategy at consulting firm Nexstep, explains that for weeks they have been recommending their clients to allocate part of their investments to the energy sector. “We believe that in balanced, aggressive and highly aggressive portfolios, the weight should be between 10% and 20%”.
1. Exchange traded funds – ETFs
Stock exchanges (ETFs) are the cheapest and most flexible way to manage risk in the energy sector. These types of products are a hybrid between a fund and a stock. They have a large investment portfolio, but can be bought and sold immediately. Immediate liquidity is necessary in a context that is as volatile as the current one.
Sergio Ávila, from IG Brokers’ analysis team, explains that “the oil and gas sector continues to benefit the most in this war context, as corporate margins increase and yields increase as crude oil prices rise.”
One of the ETFs that the company has set its sights on is SDPR S&P US Energy Select Sector ETF, one of the largest in the world, with almost 10,000 million euros. The great thing about this type of vehicle is the glorious revaluation it already has. In this case, in 2021, it increased by 67% and in 2022 it increased to 33.5%.
Javier Fernandez, Altair Finance’s CFO, says that as part of the strategy of mixed funds and stock market funds, “we are implementing an important position in the US energy sector, through an ETF that repeats the development of this sub-sector”.
2. Specific companies
At Altair Finance, they are also trying to ride in the revaluation of the sector by taking positions in some specific companies. “We especially like Exxon Mobile,” he says. The CEO recalls that in the last decade there has been an almost parallel development between oil price developments and the energy sector. “We believe that as long as the price of a barrel of crude oil continues to be this high, the profits of the oil companies will be very high,” says the expert investor.
Other respected Spanish fund managers, e.g. Azvalor O Cobas, have also been making important bets in the energy sector for some time. In the case of the former, its main positions include Tullow Oil (a British company with oil wells in Africa), as well as several coal mining specialists (such as Arch Resources or Whitehaven Coal). At the same time, Cobas Internacional’s big bet is on a liquefied natural gas carrier, such as Golar LNG, which has risen in price by 36% by 2022, given that Europe must boost imports of this type of energy if it decides to stop buy Russian gasoline.
One of the problems with buying shares in oil companies directly is that some owned shares in Russian companies that can now cause huge losses. This is the case of the British BP, which has announced its decision to sell the 19.75% it controls in the Russian giant Rosneft. However, the sale of this share is in the air, because it is not clear who will buy it and because the listing of Russian companies is paralyzing. At the same time, BP will have to write off a loss of 22,000 million euros, provided that this participation is worthless.
Jean-Luc Hivert, La Française AM’s chief investment officer, explains that although the energy sector, despite being hit by rising oil and gas prices, will also be hurt by the relationship between the major oil companies and Russia.
One of the Spanish vehicles that has achieved the best return with its commitment to the energy sector is Hamco Global Value, advised by John Tidd. Last year, the vehicle returned 43.5% by investing in small companies around the world, most of them oil companies. In 2022, that is a 9% return.
Tidd explains that he is now starting to be cautious in the energy sector. “Shares have already risen sharply and you have to keep in mind that we could see a ceasefire, which would ease oil prices. In addition, an agreement with Iran to lift sanctions and return to the international market seems imminent.
Juan Cánovas, CEO of Altair Finance, agrees that the return of Iranian oil would be easier for the oil, but adds that “it would not be something immediately and its contribution will not be enough to offset the exclusion of Russian crude oil”.
One of the most successful funds in the energy sector is Blackrock BGF World Energywith 21,000 million euros in assets and a revaluation of 58% last year.
4. Direct investment
One last option to participate in the rise in raw materials is to invest through vehicles that repeat the development of gas or oil prices. Javier Molina, Broker of the Broker eToro In Spain, he believes, a novice “should never invest more than 5% of its portfolio in this type of asset, while a more experienced investor could reach up to 15%.
The company WisdomTree has mutual funds that repeat the development of oil (such as WisdomTree WTI Crude Oior Wisdom Tree Nautral Gas) which can be purchased from Bankinter, Openbank, Renta 4 or Selfbank brokers. “Within a raw material portfolio, it would also be attractive to own a share in gold in the current circumstances,” says Molina.
- industrial. The prices of some materials used in industry and construction have also risen sharply. This is aluminum, which has risen by 9.5% last week due to fears of supply chain disruptions. Zinc, copper and nickel also rise. After all, the price development of these raw materials will depend to a large extent on the impact of the war on the world economy. If growth slows, prices will eventually fall.
- farming. Russia is a major exporter of some staple foods, such as cereals. The sanctions that have been imposed have caused wheat prices to rise by almost 60% in the Chicago market, the most important in the world, this week. Soybeans and corn have also become more expensive. A product to harness this power is Koala Sicav, which specializes in companies related to the primary sector, as well as a position in gold and diamond mining.
- Precious metals. Financial manuals argued that in times of high inflation and war, the price of gold would have to rise sharply, as it was considered a safe haven. Gold will rise by 6.8% in 2022. Silver rises 9% and palladium 55%. However, there are many mixed funds, such as Olea Neutral or DWS Kaldemorgen Concept, which have included significant participation in gold, considering that it balances the portfolio.
- International. Some exchange traded funds also allow you to invest directly in a variety of shopping carts, including industrial, valuable and agricultural products. One such product, iShares Diversified Commodity, has returned 58% in the last 12 months.
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