Preview
In focus: Investing in the energy sector
When oil prices move, energy stocks tend to follow. This has been a market feature since the start of the year. Crude prices—as represented by Brent futures—gained around 14% year-to-date (YTD, as of April 30, 2024).1 This advance resulted partly from concerns that the ongoing Middle East conflicts may disrupt oil supply, potentially worsening an already tight supply-demand situation amid the production cut implemented by the Organization of Petroleum Exporting Countries (OPEC).
The energy sector has been the best performer within the MSCI All Country World Index, delivering around 10.3% of YTD total return, ahead of the 9.8% gain in the communication services sector.2
At Templeton Global Equity Group (TGEG), our approach to investing long-term in the energy sector is not dependent on near-term oil prices, which have softened in more recent days. With eyes on fundamentals, we favor the sector for its robust free cash flow yield and shareholder-friendly capital return policies. Our stock selection here focuses on integrated oil and gas majors that can offer resilient returns throughout the market cycle.
Investment outlook
In North America, valuations look stretched entering the second quarter and earnings growth may continue to dominate investor attention. The artificial intelligence theme (AI) remains the prominent market driver. In Asia, where market performance has been mixed, we continue to look for mispricing opportunities, especially in Japan for beneficiaries of the normalization of Japan’s economy and corporate reforms. China and Hong Kong stock performance has shown signs of improvement, but we will remain selective. In Europe, we think valuations are attractive relative to the United States, with UK equities looking especially appealing. We are interested in the aerospace and defense sector, as geopolitical uncertainties persist.
Fundamentally, our base-case view remains consistent. Despite talks of rate cuts, a higher interest-rate regime, relative to recent history, is here to stay, and we think that it should act as a tailwind for our investment approach. We believe our valuation discipline and ability to discern quality through bottom-up research should position our strategies for long-term value creation.
Market review: April 2024
Global equities collectively declined in April 2024. As measured by MSCI indexes in US-dollar terms, emerging market equities—driven by strong gains in China—outperformed a global index, while developed and frontier market equities underperformed it. Global value stocks fared better than global growth stocks.
Market performance weakened as higher-than-expected inflation and resilient consumer demand in the United States cast doubt on the timing of interest-rate cuts from the US Federal Reserve. Although many companies reported strong earnings, weaker-than-expected results and/or guidance from certain firms further dampened investor sentiment. Flash reports for April indicated growth in manufacturing activity was mixed across regions, while services activity generally expanded.
Endnotes
- Source: Bloomberg. As of April 30, 2024.
- Ibid.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.