The Chief Investment Office advises investors to position for a variety of outcomes, add defensives and quality to their portfolio, and consider energy as a geopolitical hedge. (ddp)

Although Canada agreed over the weekend to return a repaired turbine to Germany, which Gazprom claims is vital for running the pipeline, there had been speculation this may only be a pretext for a permanent shutdown. Russia has already reduced gas supplies via Nord Stream 1 by 60%, citing the delayed delivery of the equipment. Deliveries via the Polish Yamal pipeline have ceased completely and those via Ukraine have also been heavily curtailed, prompting European leaders to accuse the Kremlin of using gas as a political weapon. Before the war in Ukraine started, European countries sourced 43%of their gas supplies from Russia, according to Eurostat figures. Due to supply bottlenecks, natural gas (Dutch TTF) prices are up 145% year-to-date. Only last week, the German Parliament agreed to new emergency legislation, which will allow the government to bail out energy companies that have run into financial difficulties over rising gas prices.


But while we believe that a cessation of Russian gas supply to Europe is a real possibility, one that would cause a Eurozone-wide recession with three consecutive quarters of economic contraction, there are also good reasons to assume that gas supplies will resume after the maintenance. We recommend investors position for all eventualities, as well as focus on the long-term effects of the crisis.


Uncertainty over energy supply means that market volatility will likely remain high. Global supply chain issues, the Russia-Ukraine war, rising energy prices, and high inflation are all serving as headwinds for the Eurozone, and we now forecast GDP growth of 2.7% this year and only 1.2% next year (1.5% and 0.9% for Germany). Companies are also being affected by the reduced growth outlook and economic and business challenges in the US and China, both of which are key regions for European exporters. While we continue to see select attractive opportunities for long-term investors, short-term risks should not be ignored, which is why we continue to advise investors to add defensives, such as healthcare, and quality to their portfolio. Read more on this here.


Energy still remains a popular hedge against geopolitical uncertainty. Although rising energy costs are a considerable burden for households and businesses, certain parts of the market should continue to do well. Energy stocks have fallen by around 18% since early June as recession concerns have begun to weigh on markets. But we expect commodity prices to stay high amid supply challenges. Our current forecast is for Brent crude oil to end the year around USD 125 a barrel, versus futures contracts, which price in USD 106/bbl. Amid the ongoing war in Ukraine, the sector also acts as a hedge against sanctions constraining supply availability across different commodities. Read more on global energy and other value stocks here.


The focus on energy security should boost investments in renewable energy. The Russian threat to cut off energy supplies and the tightness in various commodity markets, which is currently driving up prices, have resulted in a heightened focus on energy security. While in the near term this will likely lead to increased spending on fossil fuels such as liquefied natural gas (LNG) infrastructure, we think that in the medium-to-long term the result will be an even faster-than-expected rollout of renewable energy capacity. A greater focus on identifying reliable, cheap, and fossil-free sources of energy should create long-term investment opportunities both for traditional energy companies and for renewable innovators of next-generation energy solutions. Read more on how to position for the era of security here.


So while the threat of being cut off from Russian gas is serving as a headwind for European markets, we advise investors to position for a variety of outcomes, add defensives and quality to their portfolio, and consider energy as a geopolitical hedge. Over the longer term, the focus on energy security should support investments in clean energy.


Main contributors - Mark Haefele, Vincent Heaney, Andrew Thompson, Giovanni Staunovo, Jon Gordon


Content is a product of the Chief Investment Office (CIO).


Read original report - Nord Stream 1 maintenance raises concern over gas cutoff, 11 July 2022.