Morgan Stanley’s equity strategists looked into their portfolio and didn’t like a couple of things.
They put out a note to clients on Monday with a couple of changes, including some in the energy sector.
At the beginning of the year, the firm changed its positioning to “Overweight”. Oil prices had crashed and taken energy stocks along. Energy names looked attractive.
But in the note, chief US equity strategist Adam Parker writes that the “Overweight” allocation “frankly has been a bad call.”
It’s been a tumultuous year for commodities, including crude oil. Oil prices crawled upwards from March through June in what looked like a rebound. But in July, crude suffered its worst month since October 2008.
“The catalyst for the upgrade was continued capital spending reductions that would lead many to speculate that oil could be meaningfully higher by 2017. To some extent, this thesis is still intact. We believe the risk-reward is skewed to the positive, that oil could be meaningfully higher in a year or two, and with cyclical stocks that are down a lot, counter-consensus thinking is probably prudent. But, some things have changed this year.”
Crude oil has been getting crushed. On Monday, the energy sector was the worst-performing on the S&P 500. West Texas Intermediate crude oil fell below $US45 per barrel, the lowest since mid-March. And Brent crude, the international benchmark, fell below $US50 for the first time since January.
And even though Morgan Stanley says oil prices could be higher by 2017, the energy sector is not looking the way it did in January.
Parker notes that supplies from the US and the 12-member oil cartel OPEC have exceeded expectations. And now, a glut of Iranian oil looms, with state TV reporting that the country could boost exports within a week after sanctions are lifted, according to Bloomberg on Monday.
Morgan Stanley is still “Overweight” the energy sector. But to account for just how differently things have panned out, the firm has reduced its exposure.
The position in Schlumberger has been decreased by 1%. And, the overall energy weighting has been bumped down 1%.