Between short-term risks and new opportunities: the comment by Alexander Monk, Portfolio Manager, Global Resource Equities, Schroders
L’invasion of Ukraine by the Russia represents a devastating attack on Ukrainian democracy and European, and our first thoughts go to the Ukrainian people, who are bravely fighting to defend their freedom and sovereignty. How investors we have the duty Of to consider the implications of this crisis for our customers. We see three risks main ones that concern the equity investments in energy transition ei financial markets more generally.
Risk 1: inflation and prolonged increases in energy and commodity prices
Thereinflation it was already at its multi-decade high before the Russia invaded theUkraine, and this was particularly true of energy prices. Since the Russia represents a significant part of the global supply of Petroleum (about 12%) and of gas (about 17%), the current situation poses obvious risks for the supply of power. This concern has led to a significant increase in prices across Europe oil, gas and energy in general.
There Russia is also a major supplier of metals of the platinum group (PGM) and agricultural commodities. Its production capacity is also linked to many value chain industrial. L’inflationary impulse of the conflict – and the consequent tightening of sanctions by the West – could be rather significant and continue to weigh further on corporate profits.
Risk 2: the implications of inflation on the economy
The second risk concerns the potential impact of inflation on the economywhich includes tighter financial conditions, higher energy prices And potential wage increases – and the consequent effects on economic growth. History has shown that energy shortages and conflicts leading to higher energy prices can lead to a significant slowdown in economic activity. This risk was already evident before theescalation in Ukraine, and now it is certainly higher.
Risk 3: potential sell-off in equity markets
The last aspect concerns a potential change in the propensity of investors towards risk and a consequent sell-off generalized stock market. This could lead to outflows from equity (after a period of huge influxes around the world) and a return to bondswith investors looking for assets perceived as ‘safe haven’. The implications for equities linked to the energy transition.
We believe these three risks may have some impact on the equity linked to energy transition. The sector has been more exposed than others to the rise in commodity prices and at logistical disruption. The current situation will not lead to improvements in this regard.
The valuations in this space have retraced from the highs of 2021. However, the equity risk premium remains lower than previous levels, with the potential for valuations to drop further.
The threat of a broader economic slowdown is likely to have less of an impact in this sector given the structural nature of most of the markets related to energy transition. But the sectors most exposed to the business cycle (motor vehicles, electrical equipmentetc.) probably ne they will suffer.
Ukrainian war and investments, the long-term consequences
Someone consequences could even be interesting for the energy transition. Russia is one of the world’s leading oil and gas suppliers and has the ability to use this natural capital to its advantage given Europe’s dependence on its fuels. One of the benefits of renewable energy is that the resources that power it are more evenly distributed and can help reduce dependence on key suppliers.
Furthermore, while conventional energy prices risethe attractiveness of renewable energies continues to grow, also considering the higher costs of equipment linked to the problems of supply chains.
There situation in Ukraine adds further credit to the thesis of the transition of our energy system towards a model based on cheap, clean and reliable energy.
However, this does not change the short-term forecasts on growth and earnings of companies. The chains of supplying they continue to be under pressure from disruptions and it will take time for new demand and new projects to emerge.
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