In recent years, the energy sector has been unloved and out of favour, sitting at just below four per cent on the MSCI World index, according to Yashica Reddy, investment director of thematic equities at Schroders, during the Canadian Investment Review’s 2025 Global Investment Conference.
This underweight and under-ownership of energy is surprising for two reasons: the sector’s return on capital has been good relative to history and to broad markets and there has been unprecedented capital discipline in the sector in terms of returning cash back to shareholders.
“Core energy exposure is hugely under-owned at the moment and it’s an important diversifier to the broader market.”
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When it comes to the energy transition, governments and policymakers are concerned about energy security, dominance and infrastructure. Starting with electricity, Reddy noted demand is going to reach unprecedented levels in most developed markets between now and 2040. Globally, electricity use is 28,000 terawatt hours, which is expected to rise to 60,000 in the next 15 years.
“That’s not just because of population growth or per capita growth. It’s because of [artificial intelligence]. It’s because of heating and cooling. It’s because of electric vehicles.”
The two ways to meet all of this electricity demand quickly and at scale is renewables and gas, she said. In terms of renewables, Schroders is seeing a lot of growth on the utility side of the business, as well as free cashflow yields within solar, wind and even clean mobility. “A lot of these clean mobility companies and EV companies are going through a huge cost rationalization project and we’re taking a step back and moving back to hybrids rather than pure play EVs, so that’s a change we’re starting to see in the market.”
In terms of gas, gas markets are tight and will continue to grow strongly as all countries focus on their own need for reliable power generation, said Reddy, noting the current liquified natural gas market is 400 million tonnes per year. Alongside the U.S. Canada is going to be a beneficiary of that, she added.
She suggested institutional investors consider exposure to global energy companies that are extremely well capitalized and have a diversified portfolio that includes power, infrastructure and services, not just oil and gas. Many companies in the conventional energy sector have net cash positions on their balance sheet, she said, adding they’ll continue to generate free cash flow and attractive dividend yields, even if oil prices fall to $55 a barrel.
Within energy transition, Reddy recommended that investors consider exposure to wind equipment, energy storage, solar and renewable generation, with a defensive exposure to electrical equipment and transmission and distribution. In terms of clean mobility, she suggested a lower exposure while the market resets. The lithium market, she noted, is currently over supplied and hydrogen is still in its early stages.
“It’s a really interesting time to be invested in the energy transition sector. There’s always going to be short-term headwinds. You need to be mindful, but they can also provide really attractive entry points.”
Read more coverage of the 2025 Global Investment Conference.