Just when it seemed the economic challenges that have haunted investors this year had been priced in by financial markets, a spiralling energy crisis in Europe is threatening to provide another jolt to equity traders’ playbooks.
Anxiety is now focused on Russia’s chokehold on European gas supplies, with flows through the crucial Nord Stream pipeline to Germany cut back sharply, sending natural gas prices soaring.
Those sectors and countries with a heavy dependence on Russian fossil fuels have most at stake.
Germany’s major heavy-manufacturing companies are big gas importers and the nation’s DAX index has a 45 per cent exposure to chemicals, autos and industrials.
Yet, Europe’s economy so far has remained resilient and the full extent of the risks is proving tricky for investors to gauge.
“We really have no framework for judging how this thing is going to evolve,” said Paul O’Connor, head of multi-asset at Janus Henderson Investors, adding that the significance of the crisis “could be substantial”.
Some vulnerabilities are obvious.
A Citigroup basket of stocks sensitive to a gas shock has underperformed the broader market this year. It includes BASF, Covestro, Thyssenkrupp and Siemens as well as car makers such as BMW and Mercedes-Benz Group, and the utilities E. ON and Uniper.
According to Esther Baroudy, a senior portfolio manager at State Street Global Advisers, consumer-related sectors are “relatively vulnerable” to rising energy prices.
Mass-market type businesses with thin margins will suffer the most, as “they will have a double whammy from both the cost of energy and logistics, and the revenue side as customers’ spending power is hit by inflation,” she said.
The retail sub-index is the worst performer in the Stoxx Europe 600 gauge this year, falling 29 per cent, while the travel and leisure and consumer products segments have also lagged behind, weighed down by sinking consumer confidence.
Should Russia cut gas flows to Europe entirely, corporate earnings stand to fall by 10 per cent, Citigroup strategists estimate, while UBS economists expect a potential hit of more than 15 per cent.
Member states of the European Union reached a political agreement on Tuesday to cut their gas use by 15 per cent through next winter in an effort to soften the blow of a total cut-off, which looks increasingly likely.
Energy shares, the only European industry group in the green this year, remain a popular hedge. While oil prices have come off recent highs, they are still hovering above $100 a barrel, more than 40 per cent above 2021’s average.
“While prices remain high, oil and gas names are one of the only sectors offering positive returns,” said Louise Dudley, a global equities fund manager at Federated Hermes.
She also pointed to US utilities as an area delivering strong results.
The effort to move away from Russian fossil fuels has put the spotlight on alternatives, with Europe’s Renewable Energy Index outperforming the wider benchmark this year.
The ability of the region’s green power producers to meet heavy demand quickly enough is called into question, however.
“Governments can’t take a straight road towards renewables; compromises have to be made in this crisis and this is reflected in stock prices,” said Jens Zimmermann, senior analyst at Credit Suisse Group.
He sees US liquefied natural gas producer EQT as the main beneficiary of the crisis, alongside other LNG transporters and companies such as Williams Cos, Cheniere Energy and Tellurian.
In Europe, shippers such as Shell and TotalEnergies, as well as Switzerland’s Burckhardt Compression Holding are among his top picks.
Still, the ripples and indirect consequences of Europe’s escalating energy crisis are likely to reach further than imagined, leaving no sector untouched.
