“There are two great times to make money in stock markets,” according to a recent article in The Wall Street Journal: “the post-crash rebound and the end-of-cycle excess. Oil and technology fit the pattern perfectly in the past two years.” But the sectors offer different opportunities for investors.
Since January 2016, when oil prices hit a low, both the global oil and tech sectors have returned more than 80% (including dividends), “beating the wider market’s 53% return hands down.” History suggests, the article says, that “far bigger gains are possible for both sectors,” but this depends on “sentiment getting evermore positive.”
The article suggests that today’s fervor the tech sector will no doubt continue, but only if investors are willing to assume that future earnings will support hefty valuations and capital investment will generate high margins. It points out, however, that “the market is very poor at seeing the big picture when lots of companies chase the same opportunities; more competition ought to mean lower profits, but rarely is this factored in.” Tech stocks, it says, face this risk as investors are encouraging companies to invest in new projects which, albeit promising, face increased competition as more firms rush in.
“The opposite is underway in the oil industry,” the article says. When prices dropped in 2014, new projects were halted, and companies cut costs. Since 2013, capital spending by the five biggest global oil companies has halved. Limits on production, the article says, help bolster both oil and company share prices, “and have the further benefit of lowering production costs by reducing competition for rigs, workers and land.”
Although oil companies face high leverage and geopolitical exposure, the article concludes, oil stocks are “cheap compared to their own history and the market, and the big companies have rediscovered spending discipline.” By contrast, tech stocks are expensive, at a time when the competition for talent is pushing costs up fast and the bulk of their cash flow…are being reinvested in the quest for the next big thing.”
