Investors are facing disruptions on many fronts, from the pandemic to inflation and the war in Ukraine. European stocks dropped when Russia invaded Ukraine, and no one knows how or when the conflict will end. Europe is already grappling with the highest inflation in years and the rise in oil prices is having a negative impact on consumers as Europe is heavily dependent on energy imports.
European gas prices have reached record levels and there’s no longer the hope that the region will have a strong rebound as many investors expected. EU leaders are in agreement about the importance of bolstering European economic resilience and reducing energy imports from Russia.
Coping with a persistent inflation environment
High inflation rates are affecting energy and food prices across Europe and this is likely to continue, at least for the rest of this year. On the Janus Henderson website is an overview of what’s happened in the market so far. Investors have to get used to higher energy and food prices. There will be less energy on the market and finding substitutes will be challenging. Wheat is a key product affecting rising food prices and, once again, finding substitutes won’t be easy. There are also challenges when it comes to transport costs, with rising fuel prices and the shortage of semiconductors affecting the production of new cars.
Persistent inflation will see pressure on many companies to increase wages. They will find it difficult to pass on the inflationary prices of raw materials. As companies start finding substitutions for raw materials and new energy supplies, the challenges of this year could ease.
The uncertainty of a war on the doorstep
The proximity of Central and Eastern Europe to conflict in the Ukraine has spooked investors. The impact of the war on Europe goes beyond mere geographical proximity, given Europe’s reliance on Russian energy imports.
Markets fell when sanctions on Russia were announced and investors were weighing the potential economic impact of these sanctions. Many investors continue to feel that with the conflict in Eastern Europe, there is no way of justifying an overweight position in European equities.
The conflict has also resulted in pressure on national currencies. If central banks are unsuccessful in their attempts to support the value of currencies through higher interest rates, inflation will continue to rise.
The U.K. markets are performing a little better than countries across the channel because of the high exposure to the energy and materials sectors. European equities are performing badly, most likely due to Europe’s heavy dependency on Russian energy imports. This dependency is something they are addressing with urgency.
Turnaround in market sentiment
Investors had widely believed Europe’s markets were set for a comeback in 2022. They believed the tighter monetary policy would boost Europe’s value stocks ? companies that trade relatively inexpensively. However, since Russian troops entered Ukraine, the Stoxx 600 bank index has fallen by over a fifth. This is clear evidence of the fall in Europe’s bank stocks.
Market opportunities still exist
When there are new challenges, there are also new opportunities. Investors believe market opportunities do exist with COVID-19 restrictions lifting and travel increasing. The services sector is rebounding as tourism picks up. Robust consumer spending is being fueled by pandemic savings. Companies are investing in improvements to their operating systems and in other areas, such as sustainable energy.
Navigating the investment environment successfully will require some skills and paying close attention to market dynamics. Understanding broad themes, like climate change spending and policy pivots, will be essential in gauging the outlook for financial markets in 2022.
