Momentum Crash Supports Pipeline Sector

Drone attack disables Saudi crude ouput

Although we don’t normally highlight the favorable geopolitics of U.S. midstream energy infrastructure, this news does emphasize that much of the world’s crude oil comes from unstable regions. See WSJ story U.S. Insulated From Possible Supply Shock After Saudi Attack

Momentum Crash Supports Pipeline Sector

The action in equity markets last week was beneath the surface. Daily moves in the S&P 500 were unremarkable, but a sharp turn in momentum stocks caused lots of churning.

The resulting shift into value was welcome news for energy investors. Momentum and Value had tracked each other reasonably well for the past year until May, when Momentum began to outperform.

Eventually midstream energy infrastructure (defined as theAmerican Energy Independence Index, AEITR), and Value both weakened during the summer. By late August, Momentum had opened up a 14% gap against Value over the prior five months, with similar outperformance against AEITR.

As portfolio managers in the pipeline sector we often struggle to explain the moves in the stocks we own. Apart from earnings season, macroeconomic developments and fund flows dominate. This past period was especially hard to understand because 2Q19 earnings reports were generally as expected.

In September this trend has reversed (see Drop in hot stocks stirs memories of ‘quant quake’), for reasons no clearer than those that preceded it. Value is 8% ahead of Momentum since Labor Day, lifting the AEITR with it.

What’s behind this? Large pools of capital are deployed based on factor bets like Momentum and Value, relying on research that ascribes long term equity returns to them. Momentum has been outperforming Value for several years – since the peak in oil in 2014, which partly explains negative sentiment towards the energy sector since then.

During the summer, the difference in relative performance jumped sharply, leading to the recent correction. Perhaps slowing global growth has caused a reassessment of high fliers. It increasingly looks as if trade tariffs, which are simply import taxes, are spreading a chill across the world economy.

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Disclosure: We are invested in TGE.

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