The European equity landscape amid the energy crisis

The European equity landscape amid the energy crisis

Peter Garnry

Chief Investment Strategist

Summary:  European equities have been split into two parts with the energy and defensive sectors holding up well while consumer discretionary, real estate, and information technology stocks have been hit hard this year from higher interest rates and galloping energy costs. We remain defensive on equities overall, but in our equity note today we highlight the themes we like including the equity factor quality which we believe will see less margin compression than the weaker companies with less strong balance sheets and operating metrics.


Investors are running away from real estate, IT and consumer discretionary stocks

European equities are down 12.1% this year which given an economic slowdown and historic energy crisis pushing up cost-of-living is quite acceptable. One reason why it has not been such a bad year after all, is that the energy sector is 35.5% this year and the European equity market is heavy on consumer staples and health care stocks which have also done well. Despite some utilities are being thrown a lifeline by European governments, the overall utility sector has held up well offering its defensive qualities.

The real damage this year has been in real estate as yields have surged pushing up mortgage costs. Quite stunningly, the European real estate sector is now down 24% over the past 5 years offering no income for its investors. With financial conditions set to tighten significantly from here to cool down inflation the sector is likely going to face more headwinds. The IT sector is still interest rate sensitive through higher bond yields and the share price declines have put pressure on operating costs as the value of employee stock options has fallen. Finally, the consumer discretionary sector is hard hit by the cost-of-living crisis as we also described in our recent equity note Consumer stocks to be hit by historically high energy costs.

Regular readers of our research will know that we are still positive on commodities with energy being the main driver of returns and other tangible-driven themes such as defence, logistics, and renewable energy. Across equity factors we urge investors to seek defensive characteristics in high quality companies as they will be forced to eat less into their operating margins than the weaker players in the different industries. The 10 largest holdings in the iShares Edge MSCI Europe Quality Factor UCITS ETF are listed below. These names are not investment recommendations, but simply names that are part of the quality theme, which can be defined in many ways. One main risk for the quality factor is that these stocks come with high equity valuations and thus are a bit more interest rate sensitive than the average European stock.

  • Novo Nordisk
  • Roche
  • Neste
  • ASML
  • LVHM
  • Nestle
  • Rio Tinto
  • Unilever
  • Diageo
  • Allianz

Finally, it is important to reiterate our base case scenario. We remain defensive and expect the global equity market to correct around 33% from its peak before we have found a bottom. This view is driven by our view that inflation will be structurally higher than in previous periods due to deglobalization and operating margins will come under pressure from higher wages and higher yields.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992