Energy sector equities have risen 53% this year and have room to run while investors search for ESG assets and inflation protection, Bank of America said

BofA energy purchase chart
  • Bank of America said customers filled up on energy stocks last week, buying the most since 2008.
  • The S&P 500 Energy sector has risen 53% this year, and BofA is looking more upwards ahead.
  • BofA said customers have opted for shares in energy instead of passively investing.

Energy is the best-performing sector on the S&P 500 this year, as US oil prices have risen by about 70% and the group still has the potential for further upside, according to Bank of America.

BofA customers last week broke a six-week sales streak, buying $ 1.2 billion in U.S. stocks, marking the period of the largest inflow of energy stocks since the investment bank began trading such items in 2008.

Last week’s buying spree in shares of oil and gas companies was broad-based, with institutional and retail clients, hedge funds and companies participating, the investment bank said in a note released Tuesday. Analysts said investors have been consistently buying energy stocks since July. The bank did not specify individual share names.

“We see more room to run and note that Energy fits into more key themes (inflation-protected dividends, ESG improvement),” said Jill Carey Hall, head of the US small- and mid-cap strategy at BofA, in the research note.

ESG refers to Environmental, Social and Governance, where investors increasingly see sustainability goals and efforts as essential to how a company performs. In a separate BofA note in October, the investment bank discussed 15 energy stocks, which it said had strong green certificates as oil prices rose.

Meanwhile, many investors have been looking for ways to protect their portfolios with prices of goods and services running at several-year highs. Consumer price inflation rose to 6.2% in October, the fastest growth rate since 1990.

The S&P 500 energy sector has grown by around 53% during 2021, the best performance compared to 10 other groups tracked on the index. The sector jumped into recovery after a dive in 2020 as oil prices collapsed in the wake of weak demand due to the COVID-19 pandemic.

The energy sector may serve as a place to seek refuge in a rising inflationary environment, as equities generally tend to perform poorly under such conditions, according to asset management firm Schroders in a March 2021 report on U.S. asset prices.

“Such firms beat inflation 71% of the time, delivering an annual real return of 9.0% per year on average,” Schroders strategist Sean Markowicz said in the report. “This is a pretty intuitive result. Energy stock earnings are naturally linked to energy prices, a key component of inflation indices. So by definition, they will do well when inflation rises.”

BofA in Tuesday’s note said that its clients are choosing energy stocks rather than investing passively in the sector, and that energy ETFs have been experiencing outflows for five of the past six weeks.

Among the largest energy exchange traded funds, the Energy Select Sector SPDR Fund with $ 27 billion in total assets, according to the ETF database, has risen 53% this year, and the Vanguard Energy ETF of $ 6 billion has risen 59%.

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