Yet, with a recession on the horizon, it’s not that simple. Companies whose products are most exposed to cost compression, such as retailers, leisure providers and home builders, are seen as most likely to drag economies down, while those with better price fixing, such as consumer staples and health care, are trading at significant premiums to the broader market as investors flock to safer havens.
“There is an inflation recalibration underway and this has serious and significant consequences from a stock market perspective,” said Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust. . “Investors are looking at this world through a new lens and it’s more inflation-focused and more risk-mitigation-focused,” he said in an interview.
Under these circumstances, any sign of price easing is likely to be welcomed. “It’s the direction of inflation that matters for stock prices,” said Joachim Klement, strategist at Liberum Capital Ltd. “Each decline in inflation reduces some of the cost pressures businesses face.”
Here is an overview of the evolution of the inflation crisis in Europe in all sectors.
Energy is the only European sector in the green this year, boosted by soaring oil prices. And analysts are not ruling out further gains. On Friday, Credit Suisse Group AG raised price targets across the sector, citing Shell Plc and TotalEnergies SE as stocks likely to outperform more.
Renewable stocks, meanwhile, are seen as long-term winners as countries invest heavily to reduce their dependence on fossil fuels and imports from Russia.
For mining stocks, the outlook is less certain. Although they tend to outperform during periods of high inflation, gains may be limited by concerns over Chinese demand for metals due to the country’s real estate slowdown and the economic impact of its policy. Covid-zero, according to Morgan Stanley analysts, including Alain Gabriel.
The sector, which belongs to the value category, emerges as an inflation winner, posting the best performance among industrial groups in Europe this month. Higher interest rates to cool prices mean bigger profits on loans.
Bank of America Corp. analyst Alastair Ryan said the sector could see an 88 billion euro ($88 billion) increase in net interest income thanks to expected rate hikes. “This very significant increase in revenue is why we remain positive on banks in the face of problems elsewhere,” he wrote in a note.
On the other hand, lenders are worried about the volume of bad debt that could materialize during the impending recession, which may explain why the rise in bond yields has not provided a bigger boost than them.
Pricing power is essential during periods of inflation. Companies able to protect their margins as costs rise – such as consumer staples, healthcare and grocers – are likely to be favored, says James Athey, chief investment officer at Abrdn Plc.
Yet inflation also presents risks for European commodities. According to Morgan Stanley analysts, including Pinar Ergun, consumers in the region are more vulnerable to the rising cost of living than elsewhere in the world due to an unstable geopolitical context and the energy crisis.
“Investors appreciate the defensive nature of the sector, but at current valuation levels many opportunities have become prohibitive,” they said.
Retailers are the worst performing industry group in Europe this year, and inflation has a lot to do with it. With budgets squeezed by the cost of everything from food to energy to mortgages, consumers don’t have as much money to shop, while rising costs are also eating away at profitability.
It’s “a bleak picture for retail stocks,” said Charles Hepworth, chief investment officer at GAM Investments. “Disposable incomes for most consumers have been massively squeezed, and downward substitutions with cheaper brands are hardly the best boost to any hopes of a consumer-led recovery,” he said. he writes.
Luxury clothes can be among the safest bets. Sophie Lund-Yates, an analyst at Hargreaves Lansdown Plc, favors companies such as LVMH as customers of its Louis Vuitton brand are “less likely to be affected by falling real wages”.
As the centerpiece of the growth class, tech stocks have been at the forefront of the global equity rout this year due to soaring bond yields. And despite its underperformance, the sector “remains very expensive”, according to Barclays Plc strategist Emmanuel Cau.
“With growing signs of declining demand from semiconductors, demand destruction could be the next shoe to drop,” Cau said.
Construction and real estate
Construction faces precarious prospects. The industry is “looking forward to seeing how the dual headwinds of tight budgets and rising fares will impact demand,” says AJ Bell analyst Danni Hewson. Homebuilders like Barratt Developments Plc and Persimmon Plc have plunged more than 40% this year, while Hewson says suppliers to the sector could also be at risk. HeidelbergCement AG and Travis Perkins Plc are among the stocks to watch.
Meanwhile, Goldman Sachs Group Inc. analyst Jonathan Kownator on Friday warned of escalating macro risks for commercial real estate, downgrading Land Securities Group Plc, British Land Co Plc and Aroundtown SA. The sector has a very high negative correlation with bond yields, he said.
(Reporting by Joe Easton, Sagarika Jaisinghani and Michael Msika).