Energy Prices – Harlyn Research LLP

The Next Ten Percent

Friday, September 15th, 2023

What happens if US equities have a correction

We think that US equities may be vulnerable to a correction over the next two to three months. Our models suggest that the Technology sector may be about to underperform and that this could put pressure on other related sectors which have also performed strongly this year. We identify three separate trades which may be able to mitigate some of the impact: long-dated US Treasuries, large cap Japanese equities and Energy equities in the US and Europe. The rationale behind each idea is discussed in detail in the note, but the key point is that they are largely unrelated and therefore offer an interesting diversification strategy as well.

Filed under: Categories: Correction, Correlation, Energy Prices, Japan, US Treasuries

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Eight Non-Consensus Views

Monday, December 19th, 2022

A bearish consensus can still be complacent

We agree with the idea that US equities are going to suffer in the New Year, but disagree with many of the assumptions surrounding this view. We think US Treasuries are behaving like a risk-asset and cite their current elevated volatility as evidence. We highlight the positive correlation between equities and bonds, which means that there we may well repeat the bear market of everything we saw in H1 2022. On this basis, the dollar strengthens temporarily and the trough in equities is delayed till Q3. When the recovery comes, sectoral and geographic leadership in equities in likely to change and China will be a much bigger part of the story than Western investors currently imagine. The outlook for oil is anyone’s guess, but it will influence inflation expectations and generate bursts of volatility in all markets, contrary to its current benign behaviour.

Filed under: Categories: China, Correlation, Dollar index, Energy Prices, Market Timing, Sector Strategy, United States, US Treasuries

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Groundhog Day for Value

Friday, January 7th, 2022

Everything depends on the slope of the yield curve

We see lots of commentary suggesting that the value style is going to outperform the growth style in Europe and the US. We also see this being used as a reason for rebalancing global equity portfolios away from the US and towards Europe. We disagree with both ideas and also with the big idea behind them, which is that government yield curves are going to shift higher and/or steepen at the same time. Indeed, the recent behaviour of US Financials suggests that investors are becoming concerned about the yield curve inverting over the medium term. We also think that the new emphasis on ESG guidelines makes the value/growth trade much more complex than it used to be.

Filed under: Categories: Defensives, Energy Prices, Equities, Investment Styles, Rotation, Technology

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A Difference of Opinion

Friday, July 2nd, 2021

What ESG may mean for the Energy sector

US investors are significantly more positive about the Energy sector than their European counterparts. There could be many explanations, but we are increasingly concerned that there is a buyer’s strike in Europe. This could have unintended consequences – first of all for the implementation of a low-carbon style on a global basis, and second on the outlook for inflation in 2023 and beyond. Changes in our investment style in Europe may have moved too far in advance of changes in our lifestyle.

Filed under: Categories: Energy Prices, ESG, Eurozone, United States

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Tickets to the Moon

Friday, February 12th, 2021

After Small Caps, Energy could be next

The recent outperformance of Small Caps is starting to generate headlines, but we think there is more to come, especially in Europe. We don’t see any need to take profits, nor do we think that Small Cap outperformance is a reliable indicator of an upcoming peak in the equity index. We do accept that it may be too late to start a big overweight position, So, if you are looking for the next big thing, you may want to consider Energy.

Filed under: Categories: Energy Prices, Equities, Small Caps

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Three Ideas from the US Senate

Friday, January 15th, 2021

Energy, Healthcare and Communications in the spotlight

Elections don’t change things, except when they do. The combination of the Saudi oil cut and Democrat control of the Senate could usher in a period of materially higher oil prices. The Senate victory also means that social media companies may be threatened with more regulation and even a possible break-up. But does the new administration have the political capital to take on Big Pharma at the same time? The outlook for the Healthcare sector may be more hopeful than the Blue Wave doomsters suggested.

Filed under: Categories: Elections, Energy Prices, Equities, Sector Strategy, United States

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Income in Dollars, Please

Friday, April 17th, 2020

Time to look at European Energy equities

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.

Filed under: Categories: Corporate Bonds, Dividends, Energy Prices, Eurozone Crisis, FX rates, Government Bonds, Tail Risk

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One Disease; Three Themes

Friday, April 3rd, 2020

Consensus is looking for mean reversion in the wrong place

Three interesting ideas emerge from our regular reports. First, the volatility shock will almost certainly be as bad as 2008. Second, we believe that a long Technology /short Energy trade will have a positive pay-off no matter whether equity markets rise or fall. Third, our models are increasing exposure to EM Equities. We recognise this is a contrarian trade, but it is well-supported by our process and doesn’t depend on one or two countries.

Filed under: Categories: Emerging Markets, Energy Prices, Equities, Technology, Volatility

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Is Energy Un-Investable?

Thursday, November 7th, 2019

Sector at multi-year lows in equity and fixed income models

Nobody likes the Energy sector. On a global basis the current sell-off is as bad as all the other major declines, apart from 2014. The difference is that oil prices are much more stable now than they were then. The medium-term challenges (ESG agenda, electric cars, balance sheet distress) are all well-known, but we would be really surprised if the sector wasn’t rated overweight again within the next two years – any maybe sooner.

Filed under: Categories: Corporate Bonds, Energy Prices, Equities, Sector Strategy

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Credit Wobble

Thursday, May 30th, 2019

High Yield weakness is not caused by the Energy sector

High Yield has peaked in our fixed income models and has fallen sharply against Investment Grade. We have checked our cross-asset sector models and it isn’t caused by a problem in Energy. It looks like a straightforward loss of confidence in the outlook for Industrial High Yield. This is potentially ominous for Equities as well, but we haven’t generated a sell signal just yet.

Filed under: Categories: Corporate Bonds, Energy Prices, United States

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