There are rumblings that the energy sector, a laggard for much of this year, could be ready to rebound in 2020. Investors can participate in that action without making a full commitment to the sector via the FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR).
The FlexShares global natural resources strategy takes an “upstream” focus that targets companies with ownership or direct access to the raw materials. These natural resource companies have revenues, earnings, cash flows, and valuations that are closer linked to natural resources. The upstream focus provides improved correlation to commodity futures compared to downstream operations, granting investments greater inflation protection.
While GUNR is not 100% allocated to energy stocks, it’s top 10 lineup is home to many of the higher quality American and European oil majors that currently look attractive on valuation, including Exxon Mobil (NYSE: XOM), a stock Bank of America Merrill Lynch is bullish on for 2020.
“BAML said the stock was its top U.S. oil major pick for 2020 and that countercyclical investments and asset sales should vanquish market skepticism over whether it can outperform its peers,” reports Barron’s.
GUNR specifically identifies upstream natural resources equities based on a Morningstar industry classification system, with a balanced exposure to three traditional natural resource sectors, including agriculture, energy, and metals.
Bullish On Oil
Some analysts are bullish on global oil names, such as BP Plc (NYSE: BP), Royal Dutch Shell (NYSE: RDS-A) and France’s Total (NYSE: TOT). That’s good for GUNR because those names are also found among the ETF’s top 10 holdings.
The expected global supply glut is also the latest threat to the Organization of the Petroleum Exporting Countries and other producers, which have already enacted production caps in an attempt to stabilize prices and balance the market. Predictably, geopolitical headwinds factor into the oil equation. Fortunately, more supply cuts could be in the offing.
One reason some investors may be revisiting GUNR is that the energy sector is being viewed as a value destination and there has recently been a rotation to value away from growth.
Analysts also expect the volume of U.S. crude oil in storage should diminish in the weeks ahead before reversing course at the end of peak driving season, along with the start of the seasonal refinery maintenance period.
“Energy could surprise and emerge as one of the top sectors in the next 10 years. Stoeckle favors Chevron (CVX), ConocoPhillips (COP), BP (BP), and Total (TOT). The European stocks are particularly cheap, in part because of the divestment effort. BP stock, at $37, and Royal Dutch Shell, at $58, both trade for just 13 times projected 2019 earnings and yield 6.5%,” according to Barron’s.
For more information on the energy sector, visit our energy category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.