The European equity landscape amid the energy crisis The European equity landscape amid the energy crisis The European equity landscape amid the energy crisis

The European equity landscape amid the energy crisis

PG
Peter Garnry

Head of Equity Strategy

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.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.