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Europe’s energy sector too cheap to ignore, Fidelity says

The recent oil price retreat is just noise, and large cap energy company valuations are at historical lows, according to Toby Gibb, Fidelity International’s investment director of European equities.

The firm expects oil prices to go higher in the coming six-to-twelve months, he said in a briefing in Hong Kong last week.

The Brent Crude oil price fell below $50 a barrel last week, the lowest in 2017.

“The market has become very concerned over inventory levels in the US. The reason for that is that US inventory data is the timeliest and the best available.

“But when you take a step back and look at inventory data on a global basis, actually the picture is reasonably positive. A big driver for US inventory has been a seasonal factor: refineries go offline this time of year for maintenance,” and oil inventory builds until they come online again, he explained.

Gibb noted the energy sector has “very cheap valuations relative to the market, to the mining sector and to its historical level”.

Europe-listed large-cap energy companies are trading at historical lows of below 0.8 price-to-book ratio, according to data from Fidelity, which tracks the sector back to 1952.

One reason is that investors questioned whether the energy companies have sufficient cash flow to pay their dividends.

“But when you look at some of the recent results, for example BP or Shell, they have been very aggressive in cutting capital expenditure and cutting costs across their businesses, so their dividends are more than covered by the cash flows in the last two quarters.”

He added that mergers and acquisitions in the industry allow energy companies to benefit from synergies and improve cash flow.

The French election outcome has given a boost to European equity sentiment, as investors leave that political risks behind and focus on low valuations and improving fundamentals, he said.

But Gibb is more cautious on the European banking sector. The recent rally has priced in strong profitability, he said. “We are quite underweight Eurozone financials across the portfolios. The bank exposure tends to be more in the Nordic region and in the UK.”

Although European banks have improved their capital reserves, and some are anticipating an economic recovery and possibly a rate rise in Europe, he believes these drivers would not significantly improve the profitability of the banks in terms what they earn on interest rates.

 


The three-year performance of one of Fidelity’s Europe-focused equity funds, the Fidelity Global Investment European Equity Fund, versus its benchmark and sector average, according to FE.

Source: FE 
All fund NAVs and indices have been converted to US dollars. Note that funds in this chart may be denominated in currencies other than the US dollar.

Part of the Mark Allen Group.