The gas crisis is now at the top of the long list of risks for European stock traders



Just when it seemed the series of economic challenges that haunted investors this year had been priced in by financial markets, a spiraling energy crisis in Europe threatens to give equity traders’ playbooks another shock.
Concern now centers on Russia’s strangulation of European gas supplies, with flows through the crucial Nord Stream gas pipeline to Germany sharply reduced, sending natural gas prices skyrocketing.
Sectors and countries heavily dependent on Russian fossil fuels are most at risk. Germany’s top heavy manufacturing companies are big importers of gas and the national DAX index has 45% exposure to chemicals, autos and industrials. Yet so far the European economy has remained resilient and the scale of the risks is proving difficult for investors to assess.
“We really don’t have any framework to judge how this is going to develop,” 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 gas shock-sensitive basket of Citigroup Inc. shares has underperformed the broader market this year. It includes BASF SE, Covestro AG, Thyssenkrupp AG and Siemens AG as well as automakers such as BMW AG and Mercedes-Benz Group AG, and utilities E.ON SE and Uniper SE.
According to Esther Baroudy, senior portfolio manager at State Street Global Advisers, consumer-related sectors are “relatively vulnerable” to rising energy prices. Mass-market type businesses with low margins will suffer the most, as “they will suffer a double whammy both from the cost of energy and logistics, and from the revenue side, as the purchasing power of customers is affected by inflation,” she said.
The retail sub-index is the worst performer on the Stoxx Europe 600 gauge this year, down 29%, while the travel & leisure and consumer goods segments also lag, weighed down by lower consumer confidence.
If Russia completely cuts off gas flows to Europe, corporate profits would fall by 10%, Citigroup strategists estimate, while economists at UBS Group AG see a potential impact of more than 15%. European Union member states reached a political agreement on Tuesday to cut their gas consumption by 15% until next winter to soften the blow of a blackout, which looks increasingly likely . Energy stocks, the only European industrial group in the green this year, remain a popular hedge. Although oil prices have hit recent highs, they are still hovering above $100, more than 40% above the 2021 average.
“As prices remain elevated, oil and gas names are one of the only sectors offering positive returns,” said Louise Dudley, global equity fund manager at Federated Hermes. She also indicated that utilities in the United States is an area that is showing strong results.
The scramble 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. The ability of the region’s green energy producers to respond quickly enough to the high demand is, however, questioned.
“Governments cannot go the direct route to renewables; compromises have to be made in this crisis and that is reflected in stock prices,” said Jens Zimmermann, senior analyst at Credit Suisse Group. He sees U.S. liquefied natural gas producer EQT Corp as the biggest beneficiary of the crisis, alongside other LNG carriers and companies like Williams Cos Inc, Cheniere Energy and Tellurian Inc.