This post formed the basis of an article that appeared in The Sydney Morning Herald on 22 January 2020.
Michael Gable is a regular expert contributor to The SMH/The Age newspapers and appears in the Shares Race each Sunday.
You can access the online version of the article HERE.
Recent contributions to the Sydney Morning Herald:
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Towards the end of 2019, I explained from a fundamental and technical point of view why our market would not only have a Santa Rally, but provide some great returns over 2020. Whilst the Santa Rally was a few days late, there is no doubt that the share market has had a cracking start to the year. As we anticipated, the S&P/ASX 200 has broken to a new high and we are seeing some strong moves across many sectors. It now looks as though the broader market is also starting to accept that talk of an impending recession was all a bit silly, and global growth may well be picking up. In 2019, the Australian share market returned almost 20 per cent. Could we do the same again in 2020? The smart investors won’t take that for granted. An index tracking ETF might have done well last year if you bought in at the lows. However, maximising your returns in 2020 will be all about being in the right sectors at the right time. One of these is the energy sector.
When I wrote about Santos back in September, I made the comment that the energy sector is quite cyclical. I noted that it was also a bit unloved. With global growth now picking up, the energy sector should do well. Quite simply, more economic growth equals more demand for oil. More oil demand leads to higher prices and that results in a swift move higher in energy stocks. One way to gauge how energy stocks are trading is to look at the S&P/ASX 200 Energy Index which is known as the XEJ. The XEJ comprises energy companies within the top 200. It therefore includes companies such as Woodside Petroleum, Santos, Origin Energy, and Beach Energy, to name a few.
Looking at a chart of the XEJ reveals how the market is now piling back into energy stocks. After the initial recovery at the start of 2019, it drifted back, shedding more than 10 per cent in the space of 6 months. The share prices of energy stocks were correcting as investors were fearful of an impending recession. However, we can see that towards the end of the year, energy stocks were breaking out to the upside. That is, by pushing past the diagonal blue line, prices broke free of the correction and started to trend higher again. In some ways, the energy sector was telling us that global conditions were improving. This is why energy stocks starting moving months before the rest of the share market.
With energy stocks still being in the early stages of a rally, I believe that there is more upside in store for 2020. In terms of which energy stocks to purchase, that is down to individual preferences. But clearly for the moment, there is momentum in the sector. If you are looking to achieve some good returns this year in your share portfolio, then you will need to consider having some exposure to the energy sector.
Michael Gable is managing director of Fairmont Equities.
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