Just as the series of economic challenges that have dogged investors this year seemed to have been figured out by financial markets, a spiraling energy crisis in Europe is threatening to give another jolt to the books of equity investors, Bloomberg reports.
Concern is now focused on Russia’s stranglehold on European gas supplies, with flows through the critical Nord Stream pipeline to Germany sharply reduced, sending gas prices soaring.
Sectors and countries heavily dependent on Russian fossil fuels are most at stake. Germany’s heavy industry majors are big natural gas importers and the country’s DAX index has 45% exposure to chemicals, autos and industrials. However, the European economy has so far remained resilient and the full extent of the risks is proving difficult for investors to assess.
“We really have no framework to judge how this thing is going to play out,” said Paul O’Connor, head of multi-asset at Janus Henderson Investors, adding that the significance of the crisis “could be significant.”
Some vulnerabilities are obvious. A basket of Citigroup stocks. which is sensitive to a gas shock has underperformed the broader market this year. It includes BASF, Covestro, Thyssenkrupp and Siemens AG, as well as carmakers such as BMW AG and Mercedes-Benz Group AG, and utilities E.ON and Uniper.
According to Esther Baroudy, senior portfolio manager at State Street Global Advisers, consumption-related sectors are “relatively vulnerable” to rising energy prices. Mass-market businesses with thin margins will suffer the most, as “they will be hit twice on both the energy and logistics costs, and on the revenue side as customers’ purchasing power is hit by inflation,” he said. the same.
The retail trade sub-index is the worst-performing index in the Stoxx Europe 600 this year, down 29%, while the travel and leisure and consumer goods sectors have also lagged behind, weighed down by falling consumer confidence.
Should Russia completely halt gas flows to Europe, corporate profits would fall by 10%, Citigroup strategists estimate, while economists at UBS Group AG see a potential hit of more than 15%. European Union member states on Tuesday reached a political agreement to cut natural gas use by 15 percent by next winter, in a bid to soften the blow of a total shutdown that looks increasingly likely.
Popular hedge
Energy shares, the only European industrial group with a green tick this year, remain a popular hedge. While oil prices have moved away from recent highs, they are still hovering above $100, more than 40% above their 2021 average.
“While prices remain high, oil and gas names are one of the only sectors delivering positive returns,” said Louise Dudley, global equity fund manager at Federated Hermes. He also pointed to US utilities as a sector delivering strong results.
The push to move away from Russian fossil fuels has put the spotlight on alternatives, with Europe’s renewable energy index outperforming the broader benchmark this year. However, the ability of the region’s green energy producers to respond quickly enough to the high demand is being questioned.
“Governments cannot follow a straight path to renewables – compromises have to be made in this crisis and this is reflected in share prices,” said Jens Zimmermann, senior analyst at Credit Suisse Group.
He sees American liquefied natural gas producer EQT Corp. as the main beneficiary of the crisis, along with other LNG carriers and companies such as Williams Cos, Cheniere Energy. and Tellurian. In Europe, shippers such as Shell Plc and TotalEnergies, as well as Switzerland’s Burckhardt Compression Holding, are among its top picks.
Nevertheless, the ripples and indirect effects of the escalating energy crisis in Europe are likely to reach further than imagined, leaving no sector untouched.
“There will be some companies that will consider cutting lines or reducing shift plans,” said Danni Hewson, financial analyst at AJ Bell. “It’s a puzzle, full of inconvenient spiky pieces that may not form the picture that many businesses were looking for.”
Source: Capital
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