- According to Jeremy Grantham’s GMO, even after the rapid rise in commodity prices, it’s not too late for investors to buy energy shares.
- GMO highlighted attractive valuations and positive supply and demand dynamics that indicate much more upside for commodity stocks.
- “The clean energy transition will take decades to materialize and will actually be the main driver of commodity demand,” GMO said. Said.
Most investors think it’s probably “too late” to buy energy stocks, given the impressive one-and-a-half year-and-a-half rally that has led to significantly higher performance compared to the broader markets.
But Jeremy Grantham’s GMO revealed why it’s still a good time to load up on energy and other commodity-related stocks, even after the energy picker has outpaced the S&P 500 by more than 120 percent since the start of 2021.
It’s all about supply and demand, and even with the continued transition to clean energy, there isn’t a hard enough natural resource supply to keep up with demand, which will continue to be very strong, explained GMO’s Lucas White. first quarter letter.
“On the demand front, we have a global population that is rapidly approaching eight billion and heading significantly higher from there. More importantly, a large proportion of the global population lives in developing countries, especially those that will continue to go through the economic development phase. For decades, it has been meta-intensive.” explained White.
This, combined with the de facto cutting of most of Russia’s resource production from global supply chains, means that persistently high prices are likely for many commodities. Even a transition to a clean energy world will not end the world’s need for natural resources, as copper, lithium, nickel and cobalt are essential to power the clean energy grid of the future.
“Population growth, economic development, and decarbonisation pretty much guarantee substantial, potentially explosive growth in commodity demand,” White summarized.
But while there will be incredible demand for commodities, supply will not catch up as many oil companies are reluctant to invest in more capital expenditures after experiencing incredibly low commodity prices and pressure from ESG and ESG for such a long period of time. liquidation circles.
This period of time, which essentially led to a losing decade for energy stocks, caused oil companies to choose profit over growth in an essentially self-reinforcing cycle. These profits rise simply because they hinder reinvestments, and delaying reinvestments leads to continued supply, which leads to higher prices, which in turn means more profits.
Capital expenditures in the resources sector fell to a 15-year low of about $150 billion, according to GMO.
“If investment in production is curtailed, fossil fuel prices may remain high even if we eventually replace demand. [with clean energy]. In his last quarterly earnings call, BP CEO Bernard Looney took a page from my book and said more or less the same thing: ‘…You could see a world where oil prices were very high, even though the energy transition was accelerating because of the lack of investment. , much higher,” said White.
With an encouraging supply and demand backdrop for energy shares, investors’ deal to buy energy shares gets even sweeter when you consider current valuations, according to the memo. Source companies are still trading at a 60% discount compared to the S&P 500, even after their massive rally.
“The market does not value resource companies at reasonable levels, given any reasonable baseline of how the world is going to play out,” White said.