On a recent episode of the SS&C ALPS Advisors Building Blocks podcast, Investment Strategy Advisor Danny Schwab and Senior Investment Strategy Advisor Paul Baiocchi sat down to discuss the energy market and its major shifts in 2021.
As Baiocchi explains, some of the factors that have given a new drive for energy and midstream as a whole include the role of capital markets and what macroeconomic factor. With macro, the expectation is that inflation will continue to increase due to certain policies put into place, whether fiscal or monetary stimulus, over the course of the last 18 months.
There’s also the re-opening of the economy globally. This has led to an increase in spending and travel, which puts upward pressure on prices. Additionally, the stimulus and job protections put in place during the Covid-19 pandemic, which was likely to put upward pressure on wages, means having another put on inflation.
Historically, in an inflationary environment, commodities have done well. Energy is a sector, and the midstream space within the sector has benefited from a strong commodity pricing environment. The track record has been strong when those economic dynamics are in play.
On the other side, the capital markets environment is really about an internal rotation in the market. Ultimately it’s the value vs. growth rotation that began in the fall and has continued into 2021. The value story aligns with energy, however, and energy has been the best performer year-to-date. Midstream within energy has participated in that rally and ultimately has traded at a discount value compared to past valuations.
“Uniquely, energy and midstream within it, align with both the macroeconomic dynamics and the capital market dynamics.”
Head to the SS&C ALPS Advisors website to hear the entire episode and more of the Building Blocks podcast.
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
