High energy prices are crowding consumer spending and leading U.S. consumers to drive less and switch to more energy efficient cars. S.U.V. and pick-up sales have plunged. The economy has been thrown a monkey wrench, to which consumers and businesses are adjusting. Given the scientific evidence of the threat posed by global warming, the rise in energy prices might just be a blessing to improve energy efficiency and help the development of alternative energy to reduce carbon emissions. High oil prices should bring a supply side energy response and eventually lead to lower oil prices in 2009 and 2010.
Navigating the high oil priced markets will be challenging. Individual investors should focus on asset mix, as over 90% of long-term results will be determined by asset mix. Portfolios that are well diversified by region, sector and have a quality bias are recommended. Income oriented investors should ensure their portfolios have a healthy dose of energy exposure to help mitigate the risk of high energy prices and its inflationary impact.
The Energy sector now represents 33% of the S&P/TSX Composite. As such the outlook for the price of oil has a significant influence on the overall performance of the Canadian equity benchmark. In addition to the current price of oil, investors need to consider its impact on global economic growth as Canada is a supplier of many of the resources consumed by the rest of the world. The Canadian equity market has certainly benefited from the rise in oil prices, however, given the commodity’s price volatility and the S&P/TSX’s concentration in the Energy sector, the market will be sensitive to a pullback in the price of oil. Earnings expectations for the S&P/TSX have increased primarily due to the rising price of oil (and other commodities). We continue to believe investors should include energy stocks in their portfolios, however we do not believe Canadian equity portfolios require a market weight (one third of the portfolio) in the Energy sector. For risk management purposes we recommend individual investors underweight the sector to help ensure portfolios are well diversified and not overly concentrated in energy stocks.
Marley Snow Advisory Group at TD Waterhouse Private Investment Advice.
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