In 2019, the Australian share market returned almost 20 per cent.
Could we have the same broad-based gains in 2020? Smart investors won’t take that for granted.
An index tracking Exchange Traded Fund (ETF) might have done well last year if you bought in at the lows. However, maximising your returns in 2020 will be all about being in the right sectors at the right time.
One of these likely outperformers is the energy sector.
When I wrote about Santos in September, I made the comment that the energy sector is quite cyclical and a bit unloved.
With global growth now likely picking up, the sector should be one of those that do well this year.
More oil demand
Quite simply, more economic growth equals more demand for oil. More oil demand leads to higher prices and that results in a swift move higher in energy stocks.
One way to gauge how energy stocks are trading is to look at the S&P/ASX 200 Energy Index (XEJ), which includes top ASX 200 oil companies such as Woodside Petroleum, Santos, Origin Energy, and Beach Energy, to name a few.
Looking at a chart of the XEJ reveals how the market is now piling back into energy stocks.
After an initial recovery at the start of 2019, the XEJ drifted back, shedding more than 10 per cent in the space of six months. The share prices of energy stocks were correcting as investors were fearful of recession.
However, we can see from the accompanying technical analysis chart of the XEJ that towards the end of the year, energy stocks were breaking out to the upside. That is, by pushing past the diagonal red line, prices broke free of the correction and started to move higher again.
In some ways, the chart of the sector was telling us that global conditions were improving. This is why energy stocks starting moving months before the rest of the share market.
With energy stocks still being in the early stages of a rally, I believe that there is still more upside in store for the sector in 2020.
If you are looking to achieve some good returns this year in your share portfolio, then you will need to consider having some exposure to the energy sector.
Michael Gable is managing director of Fairmont Equities.