The Australia Institute recently published a paper detailing how fossil fuels are the worst-performing sector on the ASX 300 and have been for the past decade. $100 invested in the S&P ASX 300 Energy Index back in 2010 was only worth $104 by January 2020. It dropped to $51 with COVID-19.
They performed worse than the wider market. The S&P ASX 300 Energy Index, which is a stock market index of Australian stocks listed on the Australian Securities Exchange, dropped down 48% in the first quarter of 2020 compared to 203% for the ASX 300. One of the main factors that contributed to that drop was COVID-19, along with surging oil supply from the oil price war between Russia and Saudi Arabia.
The graph above details the ASX 200 and ASX 300 Energy comparison from 2010 through 2020. The ASX 200 Energy, as you can see, performed worse than all other sectors over the past 10 years. While many Australians are often told by both industry and political leaders that coal is the bedrock of Australia’s prosperity, the news of the fossil fuel companies’ poor performance is pretty surprising to many.
One comparison of the ASX 300 Energy Index to the whole ASX 300 Index understated or glossed over the underperformance of fossil fuel companies, though.
Key Points From The Paper
The Collapse of the Australian Market Due to COVID-19
In response to COVID-19, the Australian stock market collapsed, which showed just how vulnerable economic activity and the market valuations were to both global crises and domestic policy responses. The ASX 300 Energy index which is comprised of mainly fossil fuel companies were hit the hardest.
Fossil fuel companies lost twice as much value when compared to the broader market over the first quarter of 2020. While COVID-19 exacerbated the underperformance of fossil fuel stocks, this is actually a long-term issue. Russia and Saudi Arabia were having their price wars as well.
ASX 300 Energy Index Companies are involved in the supply of fossil fuels. Technically, the ASX 300 uses the Global industry Classification Standard (GICS), which defines Energy as companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, and other energy-related service and equipment, including seismic data collection; or, companies engaged in the exploration, production, marketing, refining and/or transportation of oil and gas products, coal and other consumable fuels.
As of March 2020, these companies were listed in the ASX 300 Energy:
- Caltex Australia
- Carnarvon Petroleum
- Cooper Energy Limited
- FAR Limited
- Karoon Energy Limited
- New Hope Corporation
- Origin Energy
- Oil Search Limited
- Paladin Energy Limited
- Soul Pattinson (W.H)
- Santos Limited
- SENEX Energy Limited
- Viva Energy Group
- Whitehaven Coal
- Worley Limited
- Woodside Petroleum
ASX 300 Vs. ASX 300 Energy
Not only did the ASX 300 Energy Index underperform, but it was also the worst-performing of all sectors on the ASX. It was the only sector to record zero growth over the decade, and the only sector to have lost value over the decade — even after the crash. The paper noted that an investment of $100,000 in the ASX 300 over the last decade would have been worth $237,000 at the peak in February 2020, falling by 31 March to $169,000.
S&P 500 Vs. S&P 500 Energy
The paper shared that these trends in Australia are reflected throughout the world. A comparison between the S&P 500 and the S&P 500 Energy showed that the Energy sector in the U.S. was well below its 2014 peak. This divide was only made larger by the COVID-19 crisis. In fact, as of March 2020, the S&P 500 Energy was a third below its starting point 10 years ago in absolute terms.
The graph above reflects this and you can see that the broader U.S. share market index nearly quadrupled while fossil fuel companies gained less than a third.
MSCI Global Index
The Morgan Stanley Capital International Index (MSCI), which is used as a common benchmark for global stock funds, also saw fossil fuel companies underperform. The MXCI’s All Country World Index (ACWI) includes markets from 49 countries and the graph below shows that the underperformance of fossil fuels is a global phenomenon.
The past 10 years were brutal on the fossil fuel companies. The paper noted that even though the information to compare the performance of these indexes is public, these results are not common knowledge. While 2020 has been a tough year economically, it seems that fossil fuel companies had been struggling well before COVID-19 hit. It’s safe to say that the fossil fuel industry doesn’t have a bright future.