Analysis: Guns and power: Positioning for new era in European stocks

Terna Energy SA

07/04/2022 07:00

By Joice Alves and Danilo Masoni
    LONDON, April 7 (Reuters) - A month of the war in Ukraine
briefly erased a year's worth of gains for European equities but
the continent's bourses have quickly recovered as investors have
poured money into sectors such as energy and defence which are
poised to benefit from one of the deepest policy shifts in the
region in decades. 
    The largest war in Europe since World War Two has suddenly
awakened governments to the urgent need of making their
economies less reliant on oil and gas imports from Russia and
building their own military security capabilities.
    After initially plunging to 12-month lows amid record
outflows on worries the war could cause a stagflation shock,
European equities have swiftly recovered. Shares in German
defence company Rheinmetall  RHMG.DE  are worth twice as much as
before the conflict while shares of wind turbine maker Vestas
Wind Systems  VWS.CO  have jumped around 40% so far. 
    The broader market  .STOXX  has recovered 11% in one month,
and is within striking distance of a record high on Jan. 4 with
overall valuations at a 34% discount to the U.S. market.    
    "The TINA argument ("There is No Alternative" to stocks) is
not as strong as it was but ... the yields you can get on many
parts of the equity space - particularly energy, materials and
financials - are still your better source of income at the
moment," said Benjamin Jones, director of macro research at
Invesco.      
    Investors' shopping bag has changed dramatically since Feb.
24 when Russia launched what it calls a "special military
operation" in Ukraine.
    "Europe will transition to be more independent and redefine
many of its sectors and economic paradigms," said Eric Lopez,
head of EMEA Equity Research at BofA Global Research. 
    "The consequences will range from the development of new
industries, the acceleration of existing ones, additional
infrastructure and technologies, while reaching independence and
leadership for some," he said.
    With its costly REpowerEU plan, the European Commission
wants to replace over 70% of Russian gas imports this year by
ramping up liquefied natural gas purchases, green energy and gas
storage.  urn:newsml:reuters.com:*:nL5N2VB22D  
    Investment flows at a regional level continue to be in
negative territory for Europe with net outflows of $17.9 billion
so far this year, according to BoFA. 
    But Morningstar data showed 2.1 billion euros of fund
inflows to the European energy sector this year, while shares of
a handful of European defence companies have attained
double-digit returns since the start of the war.    
        
    Germany and Sweden said they plan to sharply increase 
spending on defence to around 2% of their economic output.
 urn:newsml:reuters.com:*:nL8N2V20H4  urn:newsml:reuters.com:*:nL5N2VD222  
    BofA estimates 200 billion euros ($218.08 billion) of
incremental annual spending in the sector if all European
countries moved to devote 2% of their gross domestic product
spending on defence.
    Commodity-linked stocks alongside financials shares have
been the preferred sectors since the start of the war as oil and
other commodity prices surged. Healthcare is back in vogue for
its defensive traits.   
        
    "SO AWAY FROM THESE INDEXES"
    Lale Akoner, senior market strategist at BNY Mellon
Investment Management, said her top picks are commodity-rich
London FTSE 100  .FTSE  and the Norwegian index  .OSEAX . She is
avoiding Germany's Dax  .GDAXI , for its heavy exposure to
Russian energy.    
    "What I'm saying to clients is that you have ... to
understand the nuances on which country is more dependent on
natural gas and energy supply from Russia," she said. "So away
from these indexes". 
    There is a lot of investor interest in Europe's energy
sector with the REPowerEU plan expected to be positive for pure
renewables players like RWE  RWEG.DE , Orsted  ORSTED.CO  and
EDP  EDP.LS  Renováveis.
    Plans to speed up the development of alternative gas
supplies and LNG will need supporting infrastructure, which
could put E.ON  EONGn.DE , Italgas  IG.MI , Snam  SRG.MI , Terna
 TRN.MI , Red Eléctrica  REE.MC  and Enagás  ENAG.MC  in the
spotlight for potential network development.  urn:newsml:reuters.com:*:nL5N2VD3OR      
    "What's happened in Russia and Ukraine all of a sudden meant
that the energy transition from fossil fuels to more renewables
alternatives is now not just an environmental issue, it is also
now a security issue as well," Invesco's Jones said.
 ($1 = 0.9171 euro)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Europe PE discount to US    https://tmsnrt.rs/3icZmOc
European defence shares    https://tmsnrt.rs/3ug8rNb
European sectors in 2022    https://tmsnrt.rs/3JerrzM
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 (Reporting by Joice Alves in London and Danilo Masoni in Milan
Editing by Saikat Chatterjee and Matthew Lewis)
 ((Joice.Alves@thomsonreuters.com; Twitter @joiceal))