Financial market: Commodities prices are soaring.
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Commodities prices are soaring. Is the energy industry recovering?

Investments in the areas of energy and energy efficiency ought to have decent prospects on the exchanges in 2022. Nevertheless, renewable energies are still lagging behind. Rising commodities prices and the recovery of the traditional energy industry on the financial markets will probably give a boost to alternative energy sources as well.

The energy transition is helping commodities prices to recover

Energy stocks have rallied over the past several months. For one thing, that has to do with the changing course in monetary policy around the world. However, this trend has also been driven by the record leap in oil and gas prices. These fossil fuels were up by 17% and 16%, respectively, last month, the sharpest January increases in 30 years. On the stock markets, the many years of anemic growth are now being followed by good prospects for investments in the areas of energy and energy efficiency.

Rising commodities prices are affecting profits in the energy sector

The increasing prices of commodities and the tight cost controls and reluctance to engage in capital spending in the past few years are driving profits in every sector of the oil and gas industries higher once more. The dividend yields of 4.6% are twice as high as the global average. On top of that, earnings per share in 2022 could double compared to last year. Nevertheless, the price-earnings ratio (P/E ratio) of 10.9x on the MSCI World Energy Index is 34% lower than the global market. There is also a close correlation between energy company share prices and capital market returns. That is because, in times of rising yields, investors generally prefer high profitability and dividend yields.

Financial market: Close correlation between yields and energy stocks

Financial market: Close correlation between yields and energy stocks

Sources: Bloomberg, Credit Suisse
Last data point: January 28, 2022

Historical performance indications and financial market scenarios are not reliable indicators of future performance.

The energy sector exerts high pricing power on financial markets

The global energy industry currently has exorbitant pricing power because supplies have been weakened by the investment backlog of the past. The profit margins also reflect that. Because the energy industry is so capital intensive, it will take some time before the supply from various energy sources has expanded sufficiently and energy prices fall once more for an extended period.

Events on the exchange in 2022: Energy stocks are catching up to the MSCI World Index

Events on the exchange in 2022: Energy stocks are catching up to the MSCI World Index

Sources: Bloomberg, Credit Suisse
Last data point: January 28, 2022

Historical performance indications and financial market scenarios are not reliable indicators of future performance.

Why are renewable energies not yet rallying on the stock exchange in 2022?

Even though renewable energies are now the most economical, their market prices have also corrected. Why? Because they often traded at high valuations just like technology companies.

With a P/E ratio of 21.3x, the S&P Clean Energy Index still shows a valuation premium of 28% versus the MSCI World. However, its dividend yield of 2.4% is still barely above average. In contrast, profit growth is attractive, and the recovery of the traditional energy industry is likely to drive up the prices of renewable energy sources.

Financial incentives for greater sustainability

The trend toward sustainable investing in recent years has had a major impact on companies' cost of capital. For example, companies with sustainable business models are able to raise capital at a lower cost than other businesses. Further potential for cutting costs lies in energy-efficient production and automation in buildings, which are fundamentally contributing to the energy transition in this country. Swiss companies have recognized this and are making the appropriate investments to improve in these areas.

Financial market: Swiss companies responding to energy transition

These measures are how Swiss companies are responding to the transformation of the energy sector

Sources: procure.ch, Credit Suisse
Last data point: January 2022

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