Morning Notes — Cyclical Recovery

Covid-related drags should continue to fade in the weeks ahead, which will likely drive yields gently higher with curve steepening.  Equity markets should begin to embrace a more durable cyclical recovery, which will benefit the most cyclically-sensitive groups like Financials, Materials and Energy. The story on Energy is particularly interesting given the extreme underweight among long only funds and average net-short position at hedge funds.  The bias against Energy is understandable given more than 10-years of underperformance and ESG concerns.  But the structural supply issues are irrefutable as decarbonization policy starves the industry of necessary capital.  On a yearly basis, the Oil and Gas industry requires a massive amount of operating capital, notwithstanding capital required to develop new production capacity. At the moment, global energy demand is still impaired by the pandemic, which seems to be moderating after the delta wave this summer.  According to researchers, the average pandemic tends to experience four waves before dying out or transitioning to an endemic state.  The delta wave is the fourth distinct wave of this pandemic.  That fact doesn’t need to drive anyone’s investment behavior, but it’s an interesting anecdote at least.