I would love to hear 5i's take on the energy sector in Canada in general and when/if you see it breaking out and providing some bigger gains than have been seen in recent years.
Any explanation on what is holding this sector down, what needs to happen to see a breakout, would you be buyers of the sector at these multiples, do you have specific favourites - these are all questions I would love to hear your opinion on.
Thanks for all the great info you provide through this service - it has been a life-changer for me!
Energy exposure for diversification purposes certainly can still make sense and the energy sector has at least provided some return over the last three years, up 24% if looking at XEG. Energy can also have years where it is the only thing that works, and it can work quite well when it does. So overall, it does have a place in a portfolio. While we don't have hard stats on it, we would asume Canadians on average tend to be overexposed to the energy sector because of our general familiarity with it and that it makes up a good chunk of our economy. The TSX exposure is too high and we think 5% to 10% is a better allocation.
We are not big fans of commodity focused companies, just because their fortunes are dependent on whatever that commodity does, and they can't do a whole lot to offset what the commodity does over time, but again, they can have a place in a portfolio.
To get energy moving again, outside of geopolitical tensions rising, you probably need a solid expectation that worldwide growth/GDP is going to move higher and we are not sure many can/would paint this picture over the next three years. One other scenario could be that if there is underinvestment in energy capital/infrastructure, down the road supply becomes constrained to meet demand but this is probably a longer-term scenario.
With all of that said, it does not mean energy stocks can't work here. They are cheap, pay nice dividends, have ben buying back shares and a bit of a sustained rise in oil prices can move the needle for these companies. We also expect to see more M&A activity, as a corporate buyer can see a very fast pay off at current valuations, and if commodity prices rise even faster.