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CLS: Energy – Emerging Markets – US Dollar

04/01/2015

Week in Review
U.S. stocks lost a little over 2% last week, and while all 10 U.S. sectors experienced losses, consumer staples and energy fared best as investors became concerned about weaker U.S. economic data. Tensions in the Middle East rose last week, driving up oil prices. The 10-year Treasury yield was little changed, closing at 1.96%.

Most international equities were down last week; however, broad developed and emerging international exposure fared better than U.S. markets. Countries within Europe and Asia, such as Spain, Italy, and Hong Kong, posted positive gains for the week.

Oil prices spiked as Saudi Arabia launched air strikes on Yemen. Although abundant supply and sluggish demand globally remain concerns for investors, the rise in oil prices demonstrates how fast energy prices can react when global supply is potentially threatened, particularly when most of it resides in volatile, politically unstable regions.

CLS’s Stance on Energy
The energy sector was hit hard when oil prices plummeted in the second half of last year. While low oil prices are generally good for the global economy, investors in the energy sector have become concerned. Is energy still a good investment?

Although CLS is uncertain as to when oil prices will hit bottom, we continue to find the energy sector attractive, particularly given our favorable stance on emerging markets (one of our investment themes in 2015).

Between 2000 and 2010, oil consumption in emerging market countries increased by 40 percent, while demand declined in developed markets, according to the U.S. Energy Information Administration (EIA), which monitors multiple factors affecting oil prices, including supply and demand trends and projections. Among these countries, China, India, and Saudi Arabia had the largest growth in oil consumption during this period. In fact, the EIA projects virtually all net increases in oil consumption in the next 25 years will come from these emerging markets. Manufacturing makes up a large portion of their GDPs, which tend to be energy-intensive. In addition, many emerging market countries are expanding infrastructure, which will also increase demand for oil.

Because we anticipate emerging markets to experience continued growth, we believe demand for oil and other raw materials is likely to increase over the long term, driving prices up. Although CLS had exposure to the energy sector before the oil crash, we expect the energy sector to rebound in the intermediate future and don’t intend to sell exposure at steep discounts. Energy will likely be a beneficiary of emerging market strength, and we plan to maintain current energy positioning for the time being.

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