The energy sector's underperformance over the past year was the worst since 1986, according to Bank of Montreal, which may be a signal for investors to buy, or at least rebalance their holdings.
Investment strategists at BMO Nesbitt Burns on Tuesday upgraded the sector to "market weight," recommending investors "neutralize" their oil and gas portfolios in both Canada and the United States. The sector has reached "peak negativity," the strategists said in a research note.
"With the sectors [sic] recent extreme underperformance, and relatively low weight in the index, investors will likely need to rebalance their weight in the sector to avoid 'big misses,' " said the strategists, led by Brian Belski.
The analysts like the market's sense of doom. Earnings per share revisions "are one of our most trusted contrarian indicators and the fact that they have hit extreme negative levels is encouraging to us for sector performance prospects," BMO said. "Relative performance typically improves following such extreme negative revision readings."
But the note comes with a few caveats.
"Although the worst is likely behind us, overall fundamentals are still weak and likely to remain weak for some time," the strategists said. "Structural headwinds in the energy sector remain the main obstacle to any sustained outperformance of the sector."
Carrie Tait