BofA strategist Michael Hartnett says that something he calls the “silent peak oil trade” may be setting investors up for a “big negative surprise.”
In a note to clients, in a reflection on “the lust for yield, the silent ‘peak oil’ trade & the EM barbell,” Hartnett explains (emphasis added):
Many investors are fascinated by Francisco Blanche’s view that WTI could fall to $50/barrel in coming years. A strong dollar-weak commodity backdrop is seen as less helpful for EM.
We think the “peak oil” theme has played itself out convincingly across many equity markets and sectors in recent quarters (all the big outperformance in recent quarters has come from countries (e.g. Japan, peripheral Europe, India, Turkey) and sectors (e.g. consumer discretionary, banks) that do well when oil prices fall. This also suggests that the combo of rising yields and rising oil prices this year would be a big negative surprise to many.
Below is a chart showing the relative outperformance of financials and consumer discretionary stocks versus the broader market since the beginning of 2012.
The green line shows financials, the red line shows consumer discretionaries, and the blue line shows the S&P 500.
Photo: Bloomberg, Business Insider
Financials are up 30 per cent over that period and consumer discretionaries are up 30 per cent. The broader market has only risen 20 per cent over the same timeframe.
Thus, as Hartnett suggests, if oil and interest rates end up heading higher in 2013, investors would likely be caught off guard.
While the consensus expectation is that rates will rise in 2013, most expect oil to be lower. However, the commodity has been in rally mode lately, and there are always geopolitical risks and upside risks to economic growth that could support oil prices.