• Investment
  • 09 March 2022

Energy price shock: Downgrading Europe equities to underweight

By Jean Chia, Conrad Tan, Mansoor Mohi-uddin, Sim Moh Siong, Oleksiy Shkolnyk and Low Pei Han

Downgrading Europe equities to underweight

  • US bans imports of Russian oil and gas; Europe avoids embargo but vows to reduce gas flows.
  • Targeting of Russia’s energy exports moves us into the downside scenario for global growth as energy prices spike.
  • We turn more defensive in our asset allocation strategy, downgrading Europe equities to underweight and lowering our overall equities exposure to neutral. We remain overweight in Asia ex-Japan equities where we see better risk-reward beyond the near term turbulence.

On Tuesday (8 March 2022), US President Joe Biden banned imports of Russian oil and gas into the US. The United Kingdom said it would phase out its imports of Russian oil by year end. The European Union (EU), which depends on Russia for around 40% of its gas supplies, announced a plan to reduce its Russian gas imports by two-thirds within a year but stopped short of a ban.

The explicit targeting of Russia’s energy exports moves us firmly into the downside scenario for global growth and risk assets as energy prices spike. (See our previous report, War in Ukraine: The next chapter, for more details)

Severe energy price shock will hurt global growth; downgrading our GDP forecasts

The global economy is thus set to face a severe oil shock. This will have major implications for the macroeconomic outlook this year.

First, oil prices are set to trade near record levels. We now forecast Brent crude prices will trade in an elevated range of USD110-170 a barrel over the next few months and our new 3-month forecast is USD140 a barrel, far above the USD80 levels seen at the start of the year.

Second, global growth will slow more sharply this year. We downgrade our forecast for global growth by almost a full percentage point to 3.7%

in 2022 from 4.6% previously. The world economy’s recovery from the pandemic will slow sharply from last year’s five-decade high of 6.0% growth in 2021. Global growth, however, will still be buttressed by economies reopening this year. Thus, our lower forecast of 3.7% is still above the 3.0% average annual growth rate achieved by the world economy since the 1970s. We therefore do not anticipate the global economy as a whole to experience recession in 2022.

The slowdown from the oil shock will fall disproportionately on those economies that are more dependent on energy imports.

Third, inflation is set to worsen with the oil price shock from the war. Thus, despite slowing growth, we expect the Federal Reserve (Fed) and Bank of England (BoE) will raise interest rates steadily this year. In contrast, the European Central Bank (ECB) is likely to be cautious as the Eurozone is exposed to disruptions in Russian energy exports and major refugee flows coming out of Ukraine.

Fourth, the USD will stay in demand. The greenback is likely to benefit from higher Fed interest rates and safe-haven seeking inflows as volatile markets keep investors risk-averse.

Last, bond yields are likely to remain volatile. Steady Fed rate hikes this year may flatten the Treasury yield curve further, increasing the risk of the curve inverting. This would be a signal that the US economy may fall into recession.

Stagflation fears and risk aversion favour Gold in the near term

Gold is a beneficiary of stagflationary concerns fuelled by the spike in energy prices. A risk averse financial market backdrop favours the USD and there is probably greater scope for gold to strengthen against European currencies. We have low conviction whether gold can continue to stay high beyond the near term.

Amid reports that the EU is considering sizeable joint bond sales to finance energy and defence

spending, fiscal policy to deal with the immediate impact of the Ukraine crisis on European growth would be supportive of the EUR. But given the Euro area’s greater reliance on Russian gas markets, the EUR remains vulnerable to the threat of disruption to Russian gas supply.

A worsening Eurozone external account due to elevated oil and gas prices along with risk of the ECB sounding more dovish in the short term could push the EURUSD to 1.05 in 3 months’ time (previous: 1.09). There will be scope for a stronger EURUSD once the energy storm subsides but prospects for EUR recovery may not figure much as an immediate focus. We target the 12-month EURUSD at 1.09 (previous: 1.12).

Switching to a more defensive stance; downgrading Equities to Neutral

We are adopting a more defensive stance in our asset allocation strategy by downgrading Europe equities from Neutral to Underweight. This reduces our overall equities exposure to Neutral. We remain overweight in Asia ex-Japan equities, where we see better risk-reward beyond the near term turbulence.

Europe is in the eye of the storm; China looks relatively better positioned: Although all regions would be impacted by higher energy prices, Europe is in the eye of the storm with its heavy reliance on Russian energy – a key reason why the EU has been reluctant to join the US in banning energy imports from Russia.

Higher oil and gas prices would have a greater impact on Europe, and if there is a significant disruption in energy supplies, the fundamental economic shock to Europe would be greater than other regions. By comparison, China is less vulnerable to such a shock as it lacks both Europe’s exposure to Russian natural gas and the tight labour market in the US. The People’s Bank of China is also on a policy easing path, diverging from the policy trajectories of central banks in other key regions. Valuations are undemanding and we retain our Overweight on Asia ex-Japan, though we caution that rising Covid-19 cases in China and Hong Kong may dent sentiment in the near term.

We see more opportunities in Asia ex-Japan but would also highlight that pockets of opportunity exist in the other regions. For instance, sustained high energy prices would increase the incentive for businesses to pivot more towards renewables, benefiting certain companies in the Industrials and Utilities sectors. Certain commodities-related companies would also benefit from higher energy prices, though investors should be prepared to ride out significant price volatility. On a geographical basis, countries that are more energy self-sufficient and have higher reserves would also stand in better stead to ride out the energy crisis.

Important Information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.

This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.

Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.

Disclaimer
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.

The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.

This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.

This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.

Investments in financial instruments or other products carry significant risk, including the possible loss of the principal amount invested. Financial instruments or other products denominated in a foreign currency are subject to exchange rate fluctuations, which may have an adverse effect on the price or value of an investment in such products. No liability is accepted by the Bank for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from this document. Past performance is not a guarantee or indication of future results. Any prices provided in this document (other than those that are identified as being historical) are indicative only and do not represent firm quotes as to either price or size. You should contact your local representative directly if you are interested in buying or selling any financial instrument or other product or pursuing any trading strategy, investment strategy or wealth planning structure that may be mentioned in this document.

While reasonable efforts have been made to ensure that the contents of this document have been obtained or derived from sources believed by the Bank and its Affiliates to be reliable, neither the Bank nor its Affiliates has independently verified the accuracy of such source(s). The Bank and its Affiliates and their respective officers, employees, agents and representatives do not make any express or implied representations, warranties or guarantees as to the accuracy, timeliness or completeness of the information, data or prevailing state of affairs that are mentioned in this document and do not accept any liability for any loss or damage whatsoever, direct or indirect, arising from or in connection with the use of the contents of this document.

The Bank and its Affiliates may have issued other reports, analyses, or other documents expressing views different from the contents hereof and all views expressed in all reports, analyses and documents are subject to change without notice. The Bank and its Affiliates reserve the right to act upon or use the contents hereof at any time, including before its publication herein.

The author of this document may have discussed the information contained therein with others within or outside the Bank and the author and/or such other Bank personnel may have already acted on the basis of this information (including communicating the information contained herein to other customers of the Bank). The Bank, its personnel (including those with whom the author may have consulted in the preparation of this communication), and other customers of the Bank may be long or short the financial instruments or other products referred to in this document, may have acquired such positions at prices and market conditions that are no longer available, and may have interests different from or adverse to your interests. The persons providing the information to you may receive commissions, fees, rebates or other non-monetary benefits from any counterparty, broker, agent or another affiliate of the OCBC Group or any other party in respect of any trades or transactions effected for you including in relation to the investments referred to herein.

Bank of Singapore Limited is a licensed bank regulated by the Monetary Authority of Singapore in Singapore. Bank of Singapore Limited, Hong Kong Branch, is an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong and a Registered Institution as defined in the Securities and Futures Ordinance of Hong Kong (Cap.571) regulated by the Securities and Futures Commission in Hong Kong. Bank of Singapore Limited, its employees and discretionary accounts managed by its Singapore Office may have long or short positions or may be otherwise interested in any of the investment products (including derivatives thereof) referred to in this document and may from time to time dispose of any such investment products. Bank of Singapore Limited forms part of the OCBC Group (being for this purpose Oversea-Chinese Banking Corporation Limited and its subsidiaries, related and affiliated companies). OCBC Group, their respective directors and/or employees (collectively “Related Persons”) may or might have in the future interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. OCBC Group and its Related Persons may also be related to, and receive fees from, providers of such investment products.

Bank of Singapore Limited adheres to a group policy (as revised and updated from time to time) that provides how entities in the OCBC Group manage or eliminate any actual or potential conflicts of interest which may impact the impartiality of research reports issued by any research analyst in the OCBC Group.

Past performance is not always indicative of likely or future results. The value of any investment or income may go down as well as up. All investments involve an element of risk, including capital loss. Customers who are interested to invest in such investment products should read the risk disclosures and governing terms and conditions that are set out in the relevant offering documents.

Dual currency investments, structured deposits and other investment products are not insured by the Singapore Deposit Insurance Corporation or the Hong Kong Deposit Protection Scheme.

Applicable to clients booked and/or managed in the Dubai International Financial Center (DIFC) only: The information contained herein is exclusively addressed to the recipient. The offering of certain products in this document has not been and will not be registered with the Central Bank of United Arab Emirates or Securities & Commodities Authority in the United Arab Emirates. Any products in this document that are being offered or sold do not constitute a public offering or distribution of securities under the applicable laws and regulations of the United Arab Emirates. This document is not intended for circulation or distribution in or into the UAE, other than to persons in the UAE to whom such circulation or distribution is permitted by, or is exempt from the requirements of, the applicable laws and regulations of the United Arab Emirates. The distribution of the information contained herein by the recipient is prohibited. Where applicable, this document relates to securities which are listed outside of the Abu Dhabi Securities Exchange and the Dubai Financial Market. Bank of Singapore Limited is not authorized to provide investment research regarding securities listed on the exchanges of the United Arab Emirates which are outside of the DIFC.

Cross-Border Marketing
Hong Kong SAR: Bank of Singapore Limited is an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong and a Registered Institution as defined in the Securities and Futures Ordinance of Hong Kong (Cap. 571), regulated by the Securities and Futures Commission in Hong Kong. This document is for information only and is not intended for anyone other than the recipient. It has not been reviewed by any regulatory authority in Hong Kong.  It is not by itself an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. It does not have regard to the specific investment objectives, financial situation, investment experience and the particular needs of any recipient or Investor. This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates to any registration, licensing or other requirements within such jurisdiction. Indonesia: The offering of the investment product in reliance of this document is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. According, this investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Japan: The information contained in this document is for general reference purposes only. It does not have regard to your specific investment objectives, financial situation, risk tolerance and particular needs. Nothing in this document constitutes an offer to buy or sell or an invitation to offer to buy or sell or a recommendation or a solicitation to buy or sell any securities or investment. We do not have any intention of conducting regulated business in Japan. You acknowledge that nothing in this document constitutes investment or financial advice or any advice of any nature. Malaysia: Bank of Singapore Limited does not hold any licence, registration or approval to carry on any regulated business in Malaysia (including but not limited to any businesses regulated under the Capital Markets & Services Act 2007 of Malaysia), nor does it hold itself out as carrying on or purport to carry on any such business in Malaysia. Any services provided by Bank of Singapore Limited to residents of Malaysia are provided solely on an offshore basis from outside Malaysia, either as a result of “reverse enquiry” on the part of the Malaysian residents or where Bank of Singapore Limited has been retained outside Malaysia to provide such services. As an integral part of the provision of such services from outside Malaysia, Bank of Singapore Limited may from time to time make available to such residents documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of Malaysia). Nothing in such documents or information is intended to be construed as or constitute the making available of, or an offer or invitation to subscribe for or purchase any such capital markets product. Myanmar: This document and information herein is made available by Bank of Singapore Limited, which is not licensed or registered under the Financial Institutions Law (Law No. 20/2016) or other Myanmar legislation to carry on, nor do they purport to carry on, any regulated activity in Myanmar. The provision of any products and services by Bank of Singapore Limited shall be solely on an offshore basis. You shall ensure that you have and will continue to be fully compliant with all applicable laws in Myanmar when entering into discussion or contracts with Bank of Singapore Limited. Oman: This document does not constitute a public offer of investment, securities or financial services in the Sultanate of Oman, as contemplated by the Commercial Companies Law of Oman (Royal Decree No. 4/1974), Banking Law of Oman (Royal Decree No. 114/2000) or the Capital Market Law of Oman (Royal Decree No. 80/1998) and the Executive Regulations of the Capital Market Law (Ministerial Decision No. 1/2009) or an offer to sell or the solicitation of any offer to buy non-Omani investment products, securities or financial services and products in the Sultanate of Oman. This document is strictly private and confidential. It is being provided to a limited number of sophisticated investors solely to enable them to decide whether or not to make an offer to invest in financial products mentioned in this document, outside of the Sultanate of Oman, upon the terms and subject to the restrictions set out herein and may not be reproduced or used for any other purpose or provided to any person other than the original recipient. Additionally, this document is not intended to lead to the making of any contract within the territory or under the laws of the Sultanate of Oman. The Capital Market Authority of Oman and the Central Bank of Oman take no responsibility for the accuracy of the statements and information contained in this document or for the performance of the financial products mentioned in this document nor shall they have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. Russia: The investment products mentioned in this document have not been registered with or approved by the local regulator of any country and are not publicly distributed in Singapore or elsewhere. This document does not constitute or form part of an offer or invitation to the public in any country to subscribe for the products referred to herein. South Korea: The document does not constitute an offer, solicitation or investment advertisement to trade in the investment product referred to in the document.  Taiwan: The provision of the information and the offer of the service concerned herewith have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant laws and regulations of Taiwan and may not be provided or offered in Taiwan or in circumstances which requires a prior registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorised to provide the information and to offer the service in Taiwan. Thailand: Please note that neither Bank of Singapore Limited nor any other entities in the Bank of Singapore Limited’s group maintains any licences, authorisations or registrations in Thailand nor is any of the material and information contained, or the relevant securities or products specified herein approved or registered in Thailand. Interests in the relevant securities or products may not be offered or sold within Thailand. The attached information has been provided at your request for informational purposes only and shall not be copied or redistributed to any other person without the prior consent of Bank of Singapore Limited or its relevant entities and in no way constitutes an offer, solicitation, advertisement or advice of, or in relation to, the relevant securities or products by Bank of Singapore Limited or any other entities in Bank of Singapore Limited’s group in Thailand. The Philippines: The information contained in this document is not intended to constitute a public offering of securities under the Securities Regulation Code of the Philippines.  Dubai International Financial Center (DIFC): Bank of Singapore Limited has a branch registered in the Dubai International Financial Centre ("DIFC") which is regulated by the Dubai Financial Services Authority (“DFSA”). Bank of Singapore Limited (DIFC Branch) is not a financial institution licensed in the United Arab Emirates outside of the DIFC and does not undertake banking or financial activities in the United Arab Emirates nor is it licensed to do so outside of the DIFC. This material is provided for information purposes only and it is general information not specific in any way to any particular investor, investor type, strategy, investment need or other financial circumstance. As such this information is not financial advice or a financial promotion, nor is it intended to influence an investor's decision to invest. It is not to be construed as an offer to buy or sell or solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The material is only intended for persons who fulfill the criteria to be classified as “Professional Clients” as defined under the DFSA rules and should not be reviewed, received, provided to or relied upon by any other person. United Arab Emirates (U.A.E): The information contained herein is exclusively addressed to the recipient. The offering of certain products in this document has not been and will not be registered with the Central Bank of United Arab Emirates or Securities & Commodities Authority in the United Arab Emirates. Any products in this document that are being offered or sold do not constitute a public offering or distribution of securities under the applicable laws and regulations of the United Arab Emirates. This document is not intended for circulation or distribution in or into the UAE, other than to persons in the UAE to whom such circulation or distribution is permitted by, or is exempt from the requirements of, the applicable laws and regulations of the United Arab Emirates. The distribution of the information contained herein by the recipient is prohibited. Where applicable, this document relates to securities which are listed outside of the Abu Dhabi Securities Exchange and the Dubai Financial Market.  The Bank of Singapore Limited is not authorized to provide investment research regarding securities listed on the exchanges of the United Arab Emirates which are outside of the DIFC.  United Kingdom: In the United Kingdom, this document is being made available only to the person or the entity to whom it is directed being persons to whom it may lawfully be directed under applicable laws and regulations of the United Kingdom (such persons are hereinafter referred to as ‘relevant persons’). Accordingly, this document is communicated only to relevant persons.  Persons who are not relevant persons must not act on or rely on this document or any of its contents. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons. Relevant persons in receipt of this document must not distribute, publish, reproduce, or disclose this document (in whole or in part) to any person who is not a relevant person.  United States of America: This product may not be sold or offered within the United States or to U.S. persons.

Brunei: This document has not been delivered to, licensed or permitted by the Autoriti Monetari Brunei Darussalam, the authority as designated under the Brunei Darussalam Securities Markets Order, 2013 and the Banking Order, 2006; nor has it been registered with the Registrar of Companies, Registrar of International Business Companies or the Brunei Darussalam Ministry of Finance. The products mentioned in this document are not registered, licensed or permitted by the Autoriti Monetari Brunei Darussalam or by any other government agency or under any law in Brunei Darussalam. Any offers, acceptances, sales and allotments of the products shall be made outside Brunei Darussalam.