Opportunities on the Horizon: Investing Through a Slowing Economy

Thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 52 FIGURE 3 : Volatile Energy Sector Equities* Sector Peak to Trough Percent change Healthcare 7.7 Consumer Staples 4.9 Utilities -13.2 Telecom Services -27.4 IT -32.3 Industrials -42.8 Consumer Discretionary -50.7 Materials -58.3 Financials -71.4 Energy -113.9 Source: Haver Analytics as of May 3, 2023. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. * Last four periods of US Recession dates based on official National Bureau of Economic Research (NBER) calculations: Jul 1990.(Q3) -Mar 1991.(Q1), Mar 2001.(Q1) - Nov 2001.(Q4), Dec 2007.(Q4) - Jun.2009 (Q2) and Feb 2020.(Q4) - Apr 2020 (Q2) along with near-termpeaks and troughs in EPS associated with each of these four recessionary periods for each sector listed. FIGURE 4 : Energy Sector Earnings Outpace Sector Market Cap -5 0 5 10 15 20 25 30% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 % of S&P 500 Energy Mkt Cap Share Energy Share of Earnings Source: Bloomberg as of May 2, 2023. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. That said, capital inflows to conventional, carbon-based energy have returned. The world still relies on six million barrels per day of Russian crude oil exports, even if many western economies refuse to buy from them. Since the beginning of the war in Ukraine, the amount of oil in the US Strategic Petroleum Reserve has declined 38% from end-2021 levels. The US is also buying oil again to build up the stockpile. This need to hold and maintain energy stockpiles, be it oil and gas or renewables, distinguishes the energy sector from other cyclical industries ( FIGURE 4 ) . As a generally fungible commodity, crude oil trade has been redirected around the world, but the global oil price would be much higher without Russian crude exports to willing buyers. Geopolitical conflicts have and will continue to cause price spikes. Continued conflict in Ukraine and the need for the US and other countries to rebuild energy stockpiles raises the investment and development prospects for non-OPEC producers like Brazil ( FIGURE 7 ) . It also creates sustained opportunities for the renewable energy sector. Global energy companies invest in the future Between geopolitical tensions affecting energy supplies and the rise of renewable energy, the energy industry is going through a sea change. Companies are jockeying to maintain dominance in the shifting landscape. They are also mindful of the need to be capital efficient and invest more prudently.