Ben F. from Houston, TX asks: Greetings from Texas, Mitch. I’m curious to hear your thoughts on the Energy sector. It seems like the Energy sector has been performing poorly for some time now, and I’m wondering if there is a turning point in sight or if Energy investing may look different in the future. Thank you for your time.
Mitch’s Response:
Thank you for emailing your question, Ben. The Energy sector has indeed been battered down in 2020. Year-to-date through September 30, the S&P Energy sector is down -48.1%, and with global demand for energy reliant on economic activity and growth, the short-term outlook for energy is mixed at best. For example, capital spending on new energy projects is set to decline -18% this year, with global energy demand sinking by 5%, according to the International Energy Agency (IEA).1 The energy sector has not seen this type of decline since World War II.
In particular, spending on traditional energy sources – oil, gas, and coal – have taken the biggest hits while spending on renewables has held up relatively well. In terms of growing demand, the IEA expects renewables to ‘generate’ 80% of the growth in global electricity demand through 2030. To note, this does not mean renewables will become the leading generators of electricity – rather, they could be where the rate of growth is highest.
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Are You Making This Investing Mistake?
The energy sector has had a rough go of it this year and this may push investors to look to remove exposure to energy or hastily pivot to renewable energy. Making hasty decisions can be a mistake for investors who do not take the time to consider their unique financial situation. But you don’t have to fall prey to this mistake!
The energy sector has had a rough go of it this year and this may push investors to look to remove exposure to energy or hastily pivot to renewable energy. Making hasty decisions can be a mistake for investors who do not take the time to consider their unique financial situation. But you don’t have to fall prey to this mistake!
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As far as the investment perspective is concerned, there is a good argument that the oil and gas industry may have matured, with the future giving way to a more diverse energy mix. But such an outcome is by no means assured, particularly in the short-to-medium term. Oil demand is expected to continue growing rapidly in developing countries like China, India, and other Emerging Markets. The growth in these areas of the world, coupled with returning demand once the full risk of the pandemic fades, should push global oil demand to recover in the next few years. Weak performance in the Energy sector could give way to a recovery.
In investment portfolios, I would urge readers not to pivot too hastily into renewable energy plays nor to remove exposure to the Energy sector altogether. Even though Energy returns have been an anchor on total returns for the year – and in many past quarters recently – the underperformance is not likely to last indefinitely. Economic growth requires energy consumption, and the rough patch for the Energy sector is likely to give way to better returns when the outlook for growth is firmer.
Low interest rates should also help the Energy sector regain footing once demand returns to the market. Low interest rates are key for legacy companies in oil and gas to restart projects and push new development, while also allowing competitors in renewables to develop clean energy technologies – which generally require very high upfront costs.
In all, it has indeed been a rough go for the Energy sector, but I do not think investors should walk away from investments in the space. Future investments in Energy should look to include a diversified mix of energy companies, which may ultimately reflect how the world consumes energy.
In times like these, investors can fall prey to common mistakes like forgetting to take a diversified approach. But you don’t have to fall prey to these mistakes. There are common mistakes and habits that we believe can help some investors succeed while others fail. To help you understand some of these mistakes and how to avoid them, we have created the guide, “9 Retirement Mistakes to Avoid.”3
In this guide, we provide our thoughts on what we believe are 9 of the biggest retirement mistakes investors should avoid. If you have $500,000 or more to invest and want to learn more, click on the link below:
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