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(Bloomberg) -- Investors tempted by cheaper energy stocks should wait until oil prices level off, according to Ewen Cameron Watt, chief investment strategist of BlackRock Inc.’s Investment Institute.
Energy companies will struggle to deliver higher profit as long as oil remains low, undercutting the potential for returns, Watt said in an interview yesterday in Zurich.
“Investors should hold off buying energy stocks globally until prices have stabilized,” he said. “As long as oil prices fall, stocks will fall and these companies’ bonds will sell off.”
Oil slumped almost 50 percent last year as OPEC resisted calls to cut production amid a global glut. The biggest decline since the 2008 financial crisis has dragged down energy stocks, prompting some analysts to say now is the time to snap them up.
Energy companies should outperform the S&P 500 over a 12- month horizon, making current valuations attractive, Goldman Sachs analysts led by David J. Kostin said in a report dated Jan. 5. Bank of America Corp chief investment strategists Michael Hartnett and Brian Leung listed European energy companies among sectors they recommend investors buy this year.
In other industries, low oil prices may prove a boon, adding impetus to the euro-area economy, Watt said. While this growth could prevent the dollar from strengthening as much as expected, it creates opportunities for investors to buy European stocks and high-yield credit on the dip, the London-based strategist said.
“In Europe we like domestically oriented companies, while globally, we prefer health-care and technology stocks,” he said, without specifying which ones.
European oil and gas stocks have fallen almost 13 percent since Nov. 27, when OPEC decided to maintain its collective quota at 30 million barrels a day at a meeting in Vienna. The Stoxx Europe 600 Oil & Gas index is down 2.6 percent today.
Watt recommends European stocks over bunds, saying the European Central Bank’s plan to potentially expand asset purchases will probably drive down yields on the German benchmark debt.
“If I buy the bund, I am still getting better returns with DAX, even in a scenario where all companies slash dividends by 75 to 80 percent,” Watt said. “Which makes you think, ‘How mispriced is that?’”
He expects the ECB to announce a limited program of corporate bond purchases at its next meeting Jan. 22, which may include new issues. He doesn’t exclude a larger program involving sovereign quantitative easing. “Anything below full agreement on expanding the balance sheet would be a mild disappointment for the market,” he said.
Watt recommends investors hedge against a weaker-than- expected U.S. dollar by buying gold and investing in emerging markets debt, favoring cyclical stocks in the U.S.
To contact the reporters on this story: Roxana Zega in Zurich at firstname.lastname@example.org; Jan Schwalbe in Zurich at email@example.com To contact the editors responsible for this story: Jenny Paris at firstname.lastname@example.org Cindy Roberts, Steve Bailey