BlackRock Taps Into Energy and Healthcare Stocks to Shore Up Returns

The asset management giant sees opportunities for active management in these sectors.

Illustration by II

Illustration by II

As rising inflation continues to roil markets, interest in energy stocks has grown — a trend that hasn’t gone unnoticed at the world’s largest asset management firm, BlackRock.

At a Wednesday roundtable in New York, BlackRock investment professionals shared thoughts on why the sector — among others such as financials and healthcare — may be an attractive bet for equity investors.

“The great moderation is ending,” Jean Boivin, head of BlackRock’s investment institute, said Wednesday. “This world is a lot more shaped by production and supply.”

According to Boivin and his fellow panelists at the roundtable, BlackRock doesn’t believe that the economy will settle back into a 2 percent inflationary environment, but instead will land closer to 5 percent. “What used to work in historical recession periods may not work anymore,” said Wei Li, global chief investment strategist at BlackRock’s investment institute.

Because BlackRock expects this economic cycle to be shorter than those in the past, the organization advises its limited partners to be nimble when it comes to positioning their portfolios. In keeping with this view, Tony DeSpirito — CIO for the firm’s U.S. fundamental active equity strategies — sees opportunities for investors in actively managed equities, which he believes are “on sale” compared to earlier in 2022.

His fund strategies include a barbell approach: On one end of the barbell are stable stocks such as healthcare, utilities, and consumer staples, while on the other end are cyclical stocks, including energy and financials, which are more attractive to BlackRock than industrials.

DeSpirito said that healthcare, in particular, is resilient when it comes to valuations. He also noted that in the energy space, earnings have grown more than share prices. At the same time, he said that there hasn’t been a large expansion in multiples, with the major U.S. energy companies trading at between 10- and 12-times earnings.

“One of the things that’s interesting to me [is the] headquarter [discount],” DeSpirito said, referring to stocks that may be cheaper due to their location. His team has the ability to invest a certain percentage of its portfolio outside of the United States. “I think energy is an interesting place to do that,” he noted.

Specifically, DeSpirito is interested in Europe-based integrated energy providers, which are trading at roughly half a multiple of their U.S. counterparts. “If you look at the business mix, it’s just not that different,” DeSpirito said. “And it’s certainly not enough to justify that multiple gap.”

According to DeSpirito, not only are the cash flows of these European integrated energy firms attractive, but so is the fact that they’re further along in the energy transition, whether through wind power or biogas. “You should have a better terminal outlook there, and you’re getting a much better valuation,” he said. “That’s the biggest opportunity I see in energy today.”