Viewpoint on Energy and Resources
Energy and resources stocks have done well as the world economy emerges from recession, but they may still have a way to go. Dan Rice and Denis Walsh, industry experts and co-heads of the BlackRock energy and resources team, explain why there is still value to be extracted from stocks in their area of investment focus.
You see more upside in energy and resources stocks?
We do. Energy and resources stocks are discounting world growth of 0% to 0.5% for the foreseeable future. Our outlook is for the current, post-recession growth rate of 3.5% to 4% to last for at least the next year, followed by long-term sustainable growth in the area of 2%. Under this scenario, energy and resources stocks may be undervalued.
Is supply an important driver?
It is. Across the global energy commodities—oil, coal and liquefied natural gas—there will likely be enough resources to satisfy two to three years of this type of growth. Beyond that, the world is living with a commodity supply that is essentially hand to mouth. While a precarious situation, it's a very bullish outlook for commodities prices.
Where are you finding the greatest opportunities today?
We see great opportunity in coal and some of the oil service companies. Coal is an inexpensive source of power production. As a result, it is used as feedstock for the majority of power produced in countries like China and India. In terms of oil, the world remains constrained in its ability to boost global supply. Higher prices will be required to attract capital investment and grow the supply needed to meet demand.
Why invest in energy and resources stocks?
There are several very good reasons. First, we believe these stocks, because they are priced for a flat economy, are a value at current levels. Second, commodities prices should benefit over time as excess capacity is absorbed and supply tightens. Finally, commodities are a great diversification tool given their lack of correlation to other asset classes. Diversification allows investors to spread their risk across multiple assets. For that reason alone, we believe some allocation to commodities makes sense in most every investment portfolio.
* Archived articles are current as of the original date of publication.