The U.S. equities are expected to strengthen next year, but energy and industrial sector-related exchange traded funds could trail the broader markets.
The Energy Select Sector SPDR (NYSEArca: XLE) has already fallen behind the S&P 500, declining 8.3% year-to-date, compared to the S&P 500’s 13.6% rise. Meanwhile, the Industrial Select Sector SPDR (NYSEArca: XLI) is up 9.9% so far this year. [As Oil Plunged in November, Energy ETFs Added Assets]
Deutsche Bank’s chief U.S. strategist David Bianco argues that the energy sector will remain weak, with commodity prices expected to see more downside over the short-term, and energy stocks won’t see any respite until prices stop dropping, reports Tom DiChristopher for CNBC. Deutsche Bank anticipates a substantial decrease in energy companies’ profits.
Furthermore, the strategist points to three challenges for the industrials space, including a China slowdown, a strengthening U.S. dollar and falling capital expenditure levels worldwide due to current commodity prices. For instance, General Electric (NYSE: GE), which makes up 9.5% of XLI’s underlying holdings, is a major oil services provider.
“Industrial companies and a lot of even U.S. investment spending are very sensitive to the energy patch,” Bianco said on CNBC. “With what commodity prices have done, these companies are going to be forced to curtail capex to maintain cash flow.”
XLI, though, has been outperforming the broader S&P 500 over the past three months, rising 5.2% compared to the S&P 500’s 4.1% gains, despite the strengthening dollar. Historically, the industrial sector has rebounded in periods when the U.S. dollar depreciates. Consequently, this should suggests that industrials would be negatively correlated to the dollar. [Industrial ETFs Defying The Odds]