We are currently overweight energy exposures in our Core Equity Portfolio. This is largely because they are trading at low valuations and can generate significant cash flows at current energy prices. But the counterargument is that with renewables now cheaper than fossil fuels for many applications and increased pressure worldwide to reduce carbon emissions, energy stocks should be cheap because they have a limited lifespan.
We’d agree with that, but the key question is: how long? The chart below from the leading science journal Nature shows that we can expect the transition to take decades. And with little incentive for new production to be built, existing producers should be able to produce good returns for some time to come.
There’s more information at Nature’s full report here on COP26, which gives a sobering account of the reality of climate negotiations.
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