Multi-Asset

Oil Prices Stepping Away from the Brink

After a historically tumultuous April, oil prices have stabilized with the economic activity slowly restarting.
May 2020

Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable

William Pollard

After a historically tumultuous April, oil prices have stabilized with the economic activity slowly restarting. Although the percentage variations have been impressive in recent days, Western Texas Intermediate prices remain depressed below $30 per barrel (pb). While North American oil production is coming down because of cut-throat prices, oil inventories rose at a much slower pace last week, which helped reduce fear of another negative price spiral.

Chart 1: High Oil U.S. Inventories, but Stabilizing

Chart 1: High Oil U.S. Inventories, but Stabilizing

Source: Bloomberg, U.S. Dept. of Energy, BMO GAM (May 6, 2020)

Canadian Equities: What’s Going on beyond the Information-Technology frenzy?

Canada’s S&P/TSX index (+12%) outperformed most regions outside the U.S. in April after underperforming globally in Q1 as COVID broke out. We caution against the move as much of the drivers are short-lived in nature. For one, energy and consumer discretionary stocks drove the S&P/TSX rally as investors flocked to the most battered sectors. We remain bearish on both in our mid-term outlook (6-12 month), but recognize that energy stocks may continue to find near-term support as oil prices normalize on demand resumption pushing the market into deficit later this year (Source: CNBC).

We see some important and persistent factors why investors could remain cautious on the energy complex. First, depressed oil prices are underpriced as oil companies are still discounting prices above $40pb. Second, renewables and Environmental, Social & Corporate Governance (ESG) awareness will probably accelerate in a post-COVID world. Intercontinental travelling and working from home, for instance, are significant drivers of oil demand, and we expect them slowly return to pre-COVID levels. Finally, keep in mind that the energy sector, BMO Equal Weight Oil & Gas Index ETF (ticker: ZEO, +16.7%)* lagged the broad market BMO S&P/TSX Capped Composite Index ETF (ticker: ZCN, +22.8%)** in 2019 despite WTI oil prices surging 34% in 2019.

We also expect financials, the largest sector in the S&P/TSX, accounting for 28.5% of the index, to lag this year. Flat yield curves and near zero interest rates reflect the slower economic growth and credit demand. Lastly, we highlight that Canada’s Information and Technology sector has crushed other sectors due entirely to Shopify, whose stock price has doubled in 2020 (Chart 2).

Chart 2: Shopify Breakout of the Pack in 2020

Chart 2: Shopify Breakout of the Pack in 2020

Source: Bloomberg, BMO GAM (May 6, 2020)

Portfolio Update: Ideal Time for Adding High Conviction Managers

Last week, we added BMO Growth Opportunities Fund to our Select family of portfolios. The BMO Growth Opportunities Fund’s management style is highly concentrated, with a portfolio of 25-30 leading North American stocks, and a broad scope of market capitalization. Their approach is a good complement to our disciplined equity strategies and the broader beta exposure of the ETFs owned in the portfolios.

COVID has intensified disruptive market forces which offer a fertile ground for active management. For instance, firms which lack ability to increase their digital revenues will likely struggle in a socially distanced world. Well-capitalized, industry-leading companies are also likely to benefit from market consolidation whereas consumer businesses with the liquidity to outlast the crisis will take market share from competitors who do not. The post-COVID-19 market environment in equities is likely to be defined by a wide dispersion of winners and losers. We believe skilled active managers will be able to identify companies with the financial wherewithal to survive this economic downturn and whose securities have been sold off indiscriminately.

Disclosures

** The performance for (ZEO) for the period ended April 30, 2020 is (as follows: -36.23% (1 Year);
 -19.97% (3 year); -15.13% (5 year); -8.48% (10 year); and -8.04% since inception (on October 20th, 2009).

** The performance for (ZCN) for the period ended April 30, 2020 is (as follows: -7.80% (1 Year);
 1.35% (3 year); 2.49% (5 year); 4.52% (10 year); and 5.58% since inception (on May 29th, 2009).

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