The latest rise in oil and gas prices has renewed concerns about Europe’s reliance on imported fuel and its potential impact on companies as winter approaches.
Portfolio managers, however, say European listed companies overall are in a markedly different position than in 2022, when soaring gas prices in the wake of Russia’s invasion of Ukraine sparked recession fears and competitiveness concerns.
ENERGY’S LOW SHARE IN TOTAL COSTS
“When we look at the big listed companies in Europe, the upfront hit is quite manageable,” said Ciaran Callaghan, head of European equity research at Amundi. “It’s more consumers who are taking the hit, and maybe some smaller companies … that probably don’t have as diversified energy sources.”
While chemicals, materials and airline sectors remain exposed, Morgan Stanley estimates direct energy costs are only a low single-digit share of costs for many industrial companies.
Deutsche Bank estimates energy costs make up 1% of sales for STOXX 600 companies overall.
INDEX MIX HELPS
Sectors that benefit from higher energy prices account for 36% of MSCI Europe earnings, compared with about 6% generated by sectors at risk, according to Morgan Stanley.
Among the beneficiaries are energy, utilities and banks and those sectors’ share of index market capitalisation has risen to 25% from 16% five years ago.
Thomas O’Hara, investment director for European equities at GAM Investments, said European indexes are less vulnerable than in the past because of both their changed composition and companies’ greater experience in handling energy-driven inflation.
“This is a market and a real economy that is more experienced in dealing with the challenges of inflation catalysed by higher energy costs,” he said.
Energy-intensive sectors such as chemicals, steel and autos now account for a smaller share of European indexes, he noted, while banks, which benefit from higher interest rates that typically accompany spells of elevated inflation, represent a much larger weighting.
AI BOOM BOOSTS EARNINGS
Amundi’s Callaghan said spending linked to artificial intelligence was also providing support for industrial and technology suppliers, more than compensating for the energy shock.
“There is a massive AI boom and that’s feeding its way into the European market,” he said.
Direct beneficiaries of AI-related capital spending account for 8% of MSCI Europe earnings.
GLOBAL PRESENCE HELPS
“European listed companies are not a proxy for their domestic economies,” said Gilles Guibout, head of European equities at BNP Paribas Asset Management. “They are global.”
Many firms now manufacture closer to their end-markets while generating a large share of revenue outside Europe, reducing exposure to regional costs and supply disruptions.
Europe accounts for 42% of STOXX 600 members’ revenues, according to Goldman Sachs.
COMPANIES ADAPTED
GAM’s O’Hara said companies have spent the past four years strengthening supply chains, improving procurement contracts and learning how to manage inflation shocks.
Europe has also increased LNG imports, developed alternative supply routes and increased use of hedging, renewables and energy-efficiency measures.
“In 2022, firms were reacting to an energy shock. Today, energy risk management is a structural part of how they run their business,” Mario Montagnani, senior investment strategist at Vontobel, said.
Since the Iran war started in February, all sectors, besides consumer ones, have seen earnings upgrades, according to Goldman Sachs.
RISKS REMAIN
Anthony Penel, European equities manager at Edmond de Rothschild Asset Management, however, sees limits to European companies’ resilience and views markets as too complacent.
“They can’t do miracles,” he said, warning that if high oil and gas prices persist into 2027, the damage would show up indirectly through inflation, higher borrowing costs and weaker demand.
(Reporting by Danilo Masoni)
