While the price of gas shot through the roof last week, it seems that a real energy crisis can be avoided in the short term now that Vladimir Putin is going to supply extra gas. Nevertheless, the unexpected turbulence in the energy market is reason for ING to reassess its investment strategies. It is a perfect storm.
Simon Wiersma, investment manager at ING, says in a conversation with Fondsnieuws, Investment Officer Luxembourg’s sister publication, that the effect of the developments in the energy market on the investments of the major bank are twofold.
“Our analysis is that energy and oil prices will remain high for longer. We expect the profits of companies in these sectors to continue to rise for longer than is currently reflected in their prices. So we are going to overweight the energy sector in all our investment strategies.”
Wiersma also thinks that the Eurozone inflation rate - both core and headline inflation - will remain high for a long period of time. “These long-term high energy prices will eventually be passed on to core inflation,” he said. “Interest rates are likely to rise slightly and so we are going to be underweight in bonds. The neutral portfolio, which is normally half bond, currently has 45 per cent exposure to securities.”
“In an environment of rising interest rates, we have a slight preference for value stocks. These are mainly in cyclical sectors such as energy, but financial stocks are also often cyclical. We have an overweight position in financial stocks and invest more in insurers and banks compared to the benchmark because rising capital market interest rates are favourable for their earnings models.”
Daily consumer goods are in a risk area, according to Wiersma. “We have lowered our exposure to that sector to underweight. It is much more difficult to pass on price increases there, while this sector does face higher input costs.”
ABN Amro waits and sees
According to Ralph Wessels, head of investment strategy at ABN Amro, it is currently too early to adjust portfolios. “The impact will only be significant if high energy prices start to hit our long-term income hard; that will impact economic growth. We are still at too early a stage to take action and change the portfolio,” he said.
Although energy companies can benefit from rising prices, ABN Amro’s portfolios are already underweight in the energy sector, said Wessels. “The reason is the long-term trend towards sustainability. At this stage, there are too many things of which it is not clear what will happen. We are not yet anticipating because Putin might come to our aid, it might not be a harsh winter and we still have alternative energy sources such as coal and gas. Dutch consumers need not be afraid of being left in the cold.”
According to Wessels, the energy component is big when you look at inflation. “Higher inflation will last longer than we initially thought. At first we assumed only basic effects such as higher prices when the economy picks up. We now also see that international production processes are interrupted and that commodity prices are rising. We expect inflation in Europe to remain high until early next year. It is important to know what central banks will do. That too is still too unclear for an immediate strategy adjustment. For the time being, ABN Amro is also overweight in financial services.”
A perfect storm
According to Gerben Hieminga, ING economist for energy markets, this is a perfect storm. In addition to the growing expectation of a cold winter, Hieminga said the market has been taken by surprise. “The future prices for gas and oil did not show this summer that prices would rise so much in the run-up to winter,” he said during interview.
But the problem on the supply side is more pressing, he said. “European gas stocks are only 76 per cent full where 90 per cent is normal for this time of year. This summer, prices had already risen so much due to the economic recovery that the incentive to replenish stocks was gone,” Hieminga explained.
“Germany needs at least another four months to get the Nord-Stream 2, the underground gas pipeline from Russia, operational,” he said. “This could ease the pressure on prices somewhat and make the escape route to non-sustainable energy sources unnecessary. Using other sources causes all sorts of problems. For example, starting up coal and biomass plants could be a quick and relatively cheap solution, but then the climate targets would be seriously jeopardised.”
Energy will become more expensive anyway and the bills for households will rise, said Hieminga. In unfavourable cases, this could even amount to a few hundred euros per year. The same problem also applies to companies, and certainly the smaller ones are at risk. A lot depends on the temperature this winter.
National banks: risk of a shock stock market correction
Eurozone central banks are worried about a hard shock to the financial markets if inflation reaches a structurally higher level. For now, the central banks are assuming that inflation will fall back below 2 percent in 2022, but investors would do well, according to Dutch national bank DNB, to also take into account scenarios in which money depreciation becomes structurally higher. In that case, sentiment could turn at any moment and a shock market correction could be the result, said DNB President Klaas Knot on Monday in an explanation of the Financial Stability Review 2021.