Oil prices are on the rise, and while energy stocks across the board should benefit, those from emerging market economies are likely to outperform their developed market counterparts. Emerging market stocks tend to be more volatile, or “higher beta,” which means their price movements are greater than those of less volatile stocks. So when crude prices are falling, developed market energy stocks outperform, and when crude is rising, it’s the emerging market energy stocks that “tend to fare best,” according to Barron’s.
Top High-Beta Picks
As oil prices rise, there are a number of strong energy companies in the MSCI Emerging Markets Energy Index that are worth considering, including Reliance Industries (500325.India), Lukoil (LKOH.Russia), Gazprom (GAZP.Russia), Cnooc (CEO), Petrobras (PETR3.Brazil) and PetroChina (PTR).
There are also a couple of high-beta U.S.-based energy exploration and production stocks that investors should take a look at, including Anadarko Petroleum Corp. (APC), Centennial Resource Development Inc. (CDEV) and Parsley Energy Inc. (PE), according to RBC Capital Markets energy-stock analyst Scott Hanold. (To read more, see: 4 Energy Stocks Set to Surge on Rising Oil.) Several exchange-traded funds offer investors exposure to these energy plays, including Fidelity MSCI Energy Index ETF (FENY) and iShares MSCI Global Energy Producers ETF (FILL).
Rising Crude Prices
Hanold claims, “A year ago, nobody wanted to touch the high-beta stocks,” but “More recently we’re seeing a return to normalcy, where the stocks are reacting more to the price of oil.” The price of West Texas Intermediate (WTI) crude oil has risen 28% over the past year, reaching highs not seen in more than three years. Brent crude, another important oil benchmark, has risen 31% over the past year and has also reached highs not seen in the past three years. (To read more, see: 10 Experts Look to Oil and Gas to Energize Your Portfolio.)
Since high-beta stocks are more sensitive to price movements, in an environment where oil prices are trending higher, it’s the high-beta energy stocks that will experience greater increases than lower-beta stocks. Energy companies with stronger balance sheets and more stable operations tend to be low-beta and act as safe-haven picks for investors when crude prices fall. But as prices are rising, investors will abandon the stability for higher returns, flocking towards emerging market stocks and riskier U.S. stocks.