Deutsche, Morgan Stanley Bullish on European Energy

 

The sector, the second-worst performers in the region so far this year, as stocks were hit by weakness in crude oil prices and have failed to keep up with their subsequent recovery.

 

Oil and gas stocks are down 1.3 percent, compared with a 5.2 percent gain for the broader market.

 

The energy sector, which last year jumped almost 23 percent, a gain second to only mining, was expected to continue its outperformance as one of the beneficiaries of a global reflation trade, which gathered pace after Donald Trump won the U.S. elections.

 

However, Trump's failure early on to deliver on his healthcare bill has cast doubts on his ability to make good on promises for tax cuts and infrastructure spending, which had partly spurred enthusiasm for banking, mining and energy stocks.

 

Now, the energy sector's recent underperformance has been seen as an attractive opportunity by both Morgan Stanley (MS), who remain "overweight" the sector, and Deutsche Bank, who upgraded their view on the sector to a "tactical overweight" on Friday.

 

Morgan Stanley's strategy team said that the energy sector's valuations remain close to 30-years low and is now cheap relative to the market, other commodities and U.S. peers, with banks the only sector which is cheaper.

 

Weakness in the underlying oil price throughout March on worries about oversupply dented appetite for shares of oil producers. Oil prices have bounced 11 percent from their March lows, twice the gain of the oil-related stocks.

 

"The energy sector has only recently started to catch up with the move in the oil price – and should benefit if USD weakness leads to further upside for oil," strategists at Deutsche Bank said, adding that they expected energy to outperform over the coming month.