JPMorgan Chase & Co.’s asset management group sees investment opportunity in beaten-down energy stocks, a contrarian view as it looks beyond the sector’s reputation for “poor capital discipline.”
“Our portfolio managers see some reasons to be a little more positive toward some of the most profoundly out-of-favor segments of the world’s stock markets,” Paul Quinsee, J.P. Morgan Asset Management’s global head of equities, said in a report released Friday. “The energy sector is one example.”
After strong equities performance in 2019, investors aren’t expecting “supercharged returns” from stocks this year, according to the bank’s asset management unit. Instead, they’re seeking opportunities to put “fresh money” in the stock market’s laggards.
“Returns from small-cap energy stocks have been far worse than almost anything else we can find over virtually all time periods,” Quinsee said in the report. While some investors expect the sector will continue to underperform, JPMorgan’s asset management unit sees “signs of change as capital markets finally demand higher returns from management teams.”
Still, the investment opportunity in energy companies carries risks beyond management’s ability to remain disciplined.
Environmental, social, and governance factors represent a newer challenge for energy investors, as climate-related regulations could hurt earnings of companies in the sector, according to the report. GMO co-founder Jeremy Grantham warned in a paper last year that climate change has become a major risk to the economy, with hurricanes, droughts, and wildfires leading to record damage.
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Meanwhile, investors may be complacent in betting on companies with the fastest growth, according to the global equities report from JPMorgan’s asset management unit. They may feel comfortable after 2019, which JPMorgan called “yet another spectacular year for the growth style,” even as odds favor value stocks for better returns.
The gap between the pricing of high-growth companies and those with lower growth is wider than JPMorgan has observed about 95 percent of the time over the past quarter century.
“Our quantitative work suggests that investors are currently willing to pay what is historically a very high price for the fastest-growing companies,” Quinsee said. “If the growth rates do improve for some of the cheaper companies, as we expect they will, the relative value gap may narrow in 2020.”