Exposure rates of the Dorval Asset Management Range – 8 April 2022
Emotions are running high in the wake of atrocities in the war in Ukraine, reviving the sanctions process to hit the crucial power sector this time. The EU therefore approved an embargo on Russian coal, although the details are still to be clarified. Russian coal only accounts for a small share of energy use in Europe (less than 3%, cf. chart 1), but sanctions could soon be extended to the country’s oil (10% of power used) and natural gas (8% in the EU, but 15% in Germany).
Share of Russian imports in total primary energy consumption
_Coal / Oil / Natural gas
Germany / France / EU_
Some economic models indicate that the cost of a full embargo on Russian fuels would not be as restrictive as many fear, such as the figures recently published by the Council of Economic Analysis. Taking on board possible substitution, these models actually point to a surprisingly minor impact of around 0.3% of EU GDP. However, for Germany and Italy, the risk of a severe transition recession cannot be ruled out. Yet these two countries will have to brace themselves for the risk of possible cuts to Russian gas supply pipelines from next winter onwards.
It remains to be seen how far sanctions will go, and what resilience plans countries will continue to roll out, such as the €10 billion program in Italy. For now, it is astounding that European share indices are holding up well, particularly with interest rates pursuing their ascent. In fact, investors have opted to move their investments around within the different segments of the stock-market, rather than abandoning it altogether…although where would they go? Moves to step up sanctions again have put them off cyclical stocks and sent them towards defensive and growth stocks (cf. chart 2). In light of this flexibility on the European stock-markets, the Stoxx 600 has remained remarkably stable since Russia invaded Ukraine.
Defensive and growth stocks offset decline for cyclical shares in Europe
Goldman Sachs equal weight baskets – performances since invasion of Ukraine
Visible growth / Defensives / Stoxx 600 / Cyclicals
This flexibility will probably run up against a wall if the economic outlook deteriorates significantly. But for the moment, economic pessimism in Europe is curbed by falling oil prices and the boost from the end of Covid-related restrictions in the region. However, in our international strategies, we have decided to close our tactical position on European index futures in light of rising tension. We maintain moderate and highly diversified exposure to developed-market equities and invest in the energy transition theme, which has become even more timely in light of sanctions against Russia. We maintain hedging against election uncertainty in France (buying Bund vs. OAT 10-year, cf. chart 3).
OAT-Bund spread vs. opinion polls on second round
IFOP rolling opinion polls
Macron-Le Pen gap in election second round (LHS) / 10-year OAT-Bund spread (RHS)