Energy the main theme for markets and geopolitics

This month’s UK large-cap momentum screen flags major companies that benefit from aspects of the bizarre mix of economic pressures and policy responses arguably occurring as part of the end to the Great Moderation after the Cold War. Energy majors BP (BP.) and Shell (SHEL) have seen earnings upgrades and upgrade momentum this year as analysts factor in higher energy prices. But in such a politically and diplomatically sensitive sector, investors should be wary. As Investors’ Chronicle’s lead feature this week discusses, both companies work as short-term and high-return investments, with lashings of income. Share price volatility, however, can’t be ruled out. The tests that both companies fail is the next full-year earnings growth test, which factors in a fall back from this year’s exceptional rises. With Vladimir Putin confident he can smash Europe’s resolve this winter, the energy crisis has some twists and turns that could see prices move significantly with a read–through to valuations for the oil majors.  

Banks again do well on the screen, but the risk of recession being worse than feared could yet outway the tailwind higher interest rates gives banks’ profits. Then there is the geopolitical risk for Asian focussed banks HSBC (HSBA) and Standard Chartered (STAN), which will be affected by the impact of sour relations between the west and China. 

Over on Aim, our list of momentum stocks is topped by £73mn market cap Chrestchic (LOAD), which hires and sells specialist power reliability equipment. Formerly known as Northbridge Industrial Services, the company supplies the oil & gas, renewables, and utilities industries, making it something of a broad-based play on energy. Shares have already leapt substantially in the past month (albeit they have fallen back a bit in the last two weeks) on a profit upgrade. Initially covered in Simon Thompson’s Alpha reports, our small cap expert wrote an in depth update last month.