See-saw between techs and oils. Competition heats up for momentum cash
Financial Post, February 16
Claudia Cattaneo, Calgary Bureau Chief
Take Imperial Oil Ltd. and Nortel Networks Corp. They are about as dissimilar as oil barrels and the Internet. In the stock market, though, they're increasingly competing for momentum cash.
In fact, in the past year, Imperial's oil group and Nortel's technology group spiked in opposite directions on many days -- when cash flowed into oils, it was likely coming from a tech selloff, and vice versa.
The adverse market relationship has been so pronounced that Bob Lyon, vice-president of portfolio management at CI Mutual Funds Inc., has started calling oil and gas companies "the anti-techs."
With good reason. When Lyon juxtaposed the Standard & Poor's oil and gas producers index versus the Nasdaq, he found that over the past year, there was a 60% correlation between the moves of the two indexes in opposite directions -- a correlation he says is very high. The same groups in Canada, while less liquid, show the same relationship, he says.
"There is no fundamental reason why there should be an inverse relationship," Lyon said. "I mean, what does Imperial Oil have in common with Nortel? Nothing. I would say this is strictly a flow of funds issue, where investors on different days are betting one sector off against the other."
When investors are confident the economy will roar ahead, they want technology and take profits out of the oilpatch, one of the few sectors that's gained in the past year. When they're nervous about the economy, they take money out of techs and park it in oil and gas, where stocks are bargains, balance sheets are strong and earnings are rising, says Lyon, who manages the CI Global Energy Fund and the CI Signature Canadian Resource Fund.
The new market dynamic between these two groups is a difficult issue for portfolio managers to grapple with, he says.
"I do have a concern that when investors get excited again about techs or other sectors, there will be a bit of a run from oil and gas stocks," Lyon said.
It's also an uneven fight. Imperial Oil, Canada's largest oil company, has a market capitalization of $15.5-billion. Nortel, the country's largest technology company, has a market capitalization of $139-billion, even at today's depressed stock price.
And while technology accounts for about a quarter of the Toronto Stock Exchange's market capitalization, the oil and gas subindex is worth 10.6%, which, in theory, means more volatility for oil stocks.
It's a dance that's expected to continue.
In a recent report, Robert Morris and Michael Schmitz, oil analysts at Salomon Smith Barney, warn: "We remain steadfast in our opinion that many E&P shares will post solid gains again in 2001, spurred largely by mounting confidence in the sustainability of relatively firm natural gas prices, and with valuations still at very attractive levels," they said. However, "the spectre of a continued surge in technology stocks still lingers over E&P shares. Conversely, E&P stocks certainly reversed course during the first few days of this month as the Nasdaq composite index faltered."
Schmitz agrees there's no fundamental reason for the two sectors to play off one another, other than that investors have historically looked at energy as a defensive stock during difficult economic times.
Fred Pynn, vice-president and director of equity research at Bissett Investment Management, says the tug-of-war is broader than just technology versus oils.
"There is technology, and then there is everything else. Generally speaking, when technology does poorly, the balance of the market does OK," he said. "I think it's an issue more of valuation and perception of whether people are bullish on technology because they think the economic downturn is going to be short and therefore you should own it, or technology is still way too expensive because the economic downturn is going to be a little longer than expected."
Schmitz says the rhythm could break if natural gas prices hold up at current levels over the long term, supporting higher oil and gas stocks even there's a renewed interest in technology.
And analysts virtually across the board are bullish about the outlook for oil and gas stocks.
"We believe that the valuations in the sector are still extremely low," Mr. Pynn said. "We think that the valuations currently discount much lower oil and natural gas prices than we are likely to see in 2001. The outlook for the junior oil and intermediate oil sector is one of ongoing consolidation, and I think we are going to continue to see takeovers because the valuations are so low, relative to current cash flows. And I don't think the energy problems in the U.S., specifically with electricity, are going away any time soon, unless we do have an extremely poor U.S. economy, which impacts demand."
Technology has been a thorn in the side of oil and gas producers for the past couple of years, principally because it was seen as siphoning capital away from Old Economy industries.
Now the good news is that investors are no longer avoiding oils and recognizing them as a safe place to put money for quality and growth, Lyon says. "If you are not a big bull on techs, investors are saying, 'If it's not tech, this is where I want to be.' "
ccattaneo@nationalpost.com |
