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October 27, 2021

Energy Gridlock: The Sign of Economic Slowdown? 

Global energy issues have caught investors’ attention over the past month. China is rationing electricity, power plants in India are running out of coal and Europeans are paying sky-high prices for natural gas. While North America is in better shape, the global issues are contributing to higher energy prices here, including at the gas pumps. So, how did we get here and will it cause a broader economic slowdown?

 

The kink in the hose 

 

The reasons for the shortages range from bad luck to bad policies. In Europe, calm winds have curtailed wind turbine electricity supply across the continent, whereas China’s problems stem from their reduction of coal imports from Australia. Other factors include a reduction in coal, oil and gas extraction caused by the pandemic and government policies to combat climate change. 

 

A retro revival?

 

There are concerns that higher energy prices will start to constrain overall consumption and economic growth like it did in the 1970s. In our opinion, the comparisons to the 1970s are not well-founded for a few reasons. Firstly, the share of energy in consumers’ consumption baskets has fallen from 11% in 1960 to just 3% today. Secondly, consumers are still sitting on a pile of savings built up during the pandemic that could be released if the need arises.

 

Source: U.S. Bureau of Economic Analysis. As of August 31, 2021.

 

The root of the issue

 

The real reason we don’t foresee a 1970s-like recession is that most of these supply issues are solvable. In Europe’s case, they can import more gas from Russia, although politicians are probably reluctant to approve a pipeline that could be used as a political weapon. In China’s case, they can import more coal to ease the supply crunch. In India, they are ramping up domestic production targets.

 

In addition, higher energy prices increase the incentives for energy production, which will help balance supply. While we don’t expect a broader economic slowdown due to higher energy prices, we still believe the Organization of the Petroleum Exporting Countries’ (OPEC) supply discipline and recovering demand will keep the price of oil elevated into next year. 

 

Our portfolio positioning on energy

 

As you know, we take a long-term view when it comes to our positioning strategy but do make tactical adjustments as opportunities arise. Therefore, we continue to hold an overweight position in the energy sector, which has benefitted our portfolio returns. More broadly, our call to overweight equity and simultaneously underweight bonds continues to reward investors. We maintain our core view that the COVID-19 situation will continue to improve, driving a strong recovery across many sectors.

 

For more information on our portfolios and investment strategies, visit our managed solutions page on the new ci.com website.

About the Author

Alfred Lam


Alfred Lam, CFA

Senior Vice-President and Chief Investment Officer
CI Multi-Asset Management

Alfred Lam, CFA, Senior Vice-President and Chief Investment Officer, leads the CI Multi-Asset Management team. Mr. Lam has over 18 years of experience specializing in portfolio design, asset allocation, manager and fund selection, and risk management. While at CI, Mr. Lam has brought unique ideas and processes to the management of the team’s multi-asset strategies, including a mean-reversion currency management strategy, the concept of investing in concentrated and benchmark-agnostic portfolios, and a new approach to risk management. In addition to the CFA designation, Mr. Lam holds an MBA from the York University Schulich School of Business, and is a member of the CFA Institute and the Toronto CFA Society.

About the Author

Marchello Holditch


Marchello Holditch, CFA, CAIA

Vice-President and Portfolio Manager
CI Multi-Asset Management

Marchello Holditch, CFA, CAIA, Vice-President and Portfolio Manager, oversees CI's multi-manager, multi-asset investment programs. He is responsible for managing CI’s institutional and private client multi-asset portfolios and is a member of the CI Multi-Asset Investment Committee. Previously, Mr. Holditch led CI’s portfolio manager research and oversight function, where he was responsible for evaluating the investment managers of all CI funds. Prior to joining CI, Mr. Holditch worked at a major global consulting firm, where he assisted a wide variety of institutional clients with risk budgeting and asset liability modelling, as well as investment manager research and selection. He holds an Honours Bachelor of Mathematics degree in actuarial science from the University of Waterloo and is a CFA charterholder.

IMPORTANT DISCLAIMERS

 

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication.  Market conditions may change which may impact the information contained in this document. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. 

 

The opinions expressed in the communication are solely those of the authors and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.

 

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Published October 27, 2021