(Bloomberg) -- Energy has been the world’s best-performing sector this year. Still, investors have been slow in catching up with the pace of analysts’ upgrades.
The MSCI World Energy Sector Index is up 16 percent since oil started rallying in March, yet on a price-to-estimated earnings basis, the sector’s valuation is near its lowest level since 2015.
“Energy stocks score quite favorably on price momentum and especially earnings revisions,” said Max Kettner, a cross asset strategist at Commerzbank AG. “They are still relatively cheap.”
The reason why P/E ratios haven’t taken off during the stock price rally is because the surge in crude has sparked a wave of profit forecast upgrades from analysts. In Europe, the sector is now expected to post a jump of 24 percent in earnings this year, compared with 12 percent at the start of the year. The still very low valuation ratios signal that investors have been slower than analysts to price in the improvement in the sector’s fundamental metrics as oil rallied, worrying instead about long-term prospects for oil demand.
Crude has risen this month after U.S. President Donald Trump pulled out from a nuclear agreement with world powers that had eased sanctions on Iran in exchange for curbs on its atomic program. Brent now trades at around $78 a barrel, up from about $50 a year ago.
“The energy sector’s valuations still look attractive,” Britta Weidenbach, co-head of EMEA equities at Deutsche Asset Management, said by phone. “We’re seeing better cash returns to shareholders. But the cash returns need to improve even more to make investors more confident about the sector."
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