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Energy and security stocks for the new era

Shares taking momentum into a new monetary policy regime
March 17, 2022

 

  • US Fed signals more aggressive stance against inflation
  • Bank of England hikes base rate to 0.75 per cent
  • Energy security remains a prime concern

Federal Reserve Chair, Jerome Powell, has finally signalled the US central bank’s intent to take an aggressive line against inflation, although may have to get realistic about the prospects the actions will slow growth and have implications for employment figures.  The companies that investors are keen on according to our momentum screen shows what the market expects given a new Fed policy regime and a very different geo-political back-drop.

The Fed increased its target base interest rate to between 0.25 an 0.5 per cent, but importantly the so-called dot plot of where Federal Open Market Committee (FOMC) members expect rates to head, suggests a the target interest rate could be almost 2 per cent by the end of the year. That decision was followed by the Bank of England raising the UK base rate to 0.75 per cent. As inflation continues to bite, policy makers both sides of the Atlantic have had their hands forced. Many analysts were already expecting a hawkish turn and our earnings upgrade momentum screen reflects the companies the market is most optimistic about both in a tighter monetary policy regime and with ongoing uncertainty over Russia's war against Ukraine. 

Energy security is a central theme for governments and investors following Russia’s invasion of Ukraine and the subsequent sanctions imposed on the aggressor. The top two companies on our US screen are both oil engineering firms, Halliburton (US:HAL) and Baker Hughes (US:BKR).

Our UK large cap screen is topped by British Gas owner Centrica (CNA), which has a strong position in the consolidating energy supply market. Also ranking highly is SSE (SSE), which has a strong focus on renewable energy provision. In the case of SSE, the earnings growth expectations are a little further out, but investors enjoy a decent dividend. 

Mid-cap and smaller UK company screens continue the energy-related theme, with the mid-cap UK screen topped by Drax (DRX), a specialist in biofuels and hydro-electric assets. Our small cap (including Aim-listed) shares screen sees Serica Energy (SQZ), which is principally concerned with exploiting the UK’s strategically important North Sea oil & gas reserves. 

Cyber security is another theme that was already important but has only become more pertinent given the breakdown in relations between the West and Russia and deep mistrust with China.  Kape Technologies (KAPE) rates highly on the UK small companies screen and from the US screen, Juniper Networks (US:JNPR) is a major player in network security solutions.

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