One striking feature of today’s markets is how much investors seem to dislike energy. The sector isn’t exactly languishing: the MSCI World Energy index has returned 25% per year over three years in sterling terms.
Yet it still feels like a most reluctant bull market in which many buyers would rather not participate. It certainly doesn’t help that the heavy focus that many asset managers put on sounding green and sustainable left them completely on the wrong side of the market when oil roared back after the pandemic. But the general sense of discomfort around the sector goes deeper than that.
Take the questions around Berkshire Hathaway’s energy business that have had plenty of coverage recently. I don’t have a view on how attractive the business is for Berkshire in the future and I can’t pretend to have much insight into US utility regulation.
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The cynic in me thinks that Buffett’s comments may be a rather obvious effort to jawbone regulators and courts into going a bit easier on his firm than a convincing threat to bail out. But I can certainly see that many Berkshire shareholders would be happy if the conglomerate stepped back from investing in energy and handed out more of its cash as share buybacks or even a dividend.
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Energy investment and AI come hand in hand
This reticence about investing in a difficult, grubby, old-fashioned sector is a problem. The world will need a significant amount of investment in energy infrastructure in the years ahead to achieve goals such as decarbonisation or electrification, as well as meeting our continually growing demand for more energy.
It seems odd that the market is fixated on the potential of artificial intelligence (AI), without factoring in the demand that AI systems will create if rolled out on the scale that their proponents suggest. Even if AI falls flat, the same goes for other digital-economy themes such as cloud computing.
Already, annual electricity consumption by data centres is forecast to double between 2022 and 2026, to almost 1,000TWh, according to the International Energy Agency – roughly the current annual consumption of Japan. A true AI revolution – on which I remain unconvinced for now – will surely push demand far higher.
This is why energy strikes me as increasingly interesting – it’s a beneficiary of many trends and yet it remains unloved. The caveat is that the technology isn’t a one-way bet. Last week, I wrote about the exchange-traded funds (ETFs) that have done well over the past year (including nuclear power).
If you also look at those that did badly, they include hydrogen, solar, clean tech, green energy, rare earths metals, strategic materials and so on. These ETFs are often very concentrated, with high weightings to smaller, pure-play companies that are prone to boom and bust.
Some will be poised for a rebound – but personally, I see areas such as liquefied natural gas, copper and nuclear as being simpler ways to play the overall trend of higher demand for electricity.
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