The Russia-Ukraine battle is ready to have far-reaching results that may reshape European geopolitics, societies and monetary markets, in accordance with Financial institution of America (BofA).
In a report titled European Thematics: A New Path for Europe that was revealed on 22 March, the financial institution recognized seven key structural funding themes that it expects to redefine Europe due to the battle.
“The implications will vary from the event of latest industries, the acceleration of present ones, further infrastructure and applied sciences,” it states, including that the battle may additionally come at a value to some industries.
The thematic developments highlighted are elevated defence spending; a higher emphasis on environmental, social and governance (ESG); a sector-wide vitality transition to renewables and independence; reshoring for the safety of provide; structural modifications to attain higher value competitiveness; and better inflation and rates of interest.
The report additionally singled out a number of shares throughout 13 sectors which might be uncovered to every investing theme, of which have a collective market cap of $1.75trn.
Elevated defence spending
BofA anticipates Europe to extend its defence spending price range to between €150bn and €200bn in 2022 and 2023, following Germany’s choice to double its defence price range on 14 March.
The funding financial institution believes cybersecurity, space-based connectivity in addition to analysis and high-end applied sciences, corresponding to semiconductors, will probably be a precedence for “European defence supremacy”.
Throughout the defence and know-how sectors, BofA famous 4 inventory picks, together with aerospace producers Thales [HO.PA] and SAAB [SAAB-B.ST], arms maker Rheinmetall [RHM.DE] and safety applied sciences developer Hensoldt [HAG.F].
Vitality transition to renewables and independence
Vitality independence is the “primary strategic precedence” for Europe, BofA mentioned. Nevertheless, transferring the area’s reliance from Russian oil and gasoline is anticipated to require vital funding throughout three core areas: gasoline infrastructure, low carbon vitality sources and carbon seize. Within the push for vitality independence, the financial institution’s inventory picks are Shell [SHEL] and Equinor [EQNR].
Whereas BofA is sceptical of Europe’s potential to attain this within the quick time period, it expects the area’s long-term vitality transition to be key to reaching independence. It sees rising funding in seven areas, together with in renewables, nuclear vitality, gasoline and electrical energy networks, vitality effectivity, various energies corresponding to biofuels, hydrogen and carbon seize, and electrical autos (EVs).
There are a number of corporations that it highlighted as its prime picks, together with Vestas Wind Programs [VWS.CO], Siemens Vitality [ENR.DE], Aker Carbon Seize [ACC.OL], Mercedes Benz [DAI.DE], Air Liquide [AI.PA] and RWE [RWE.DE].
Reshoring and safety of provide
In line with BofA, for Europe to cut back its reliance on exterior provide chains, a number of coverage and company initiatives are wanted to speed up reshoring. One of many three areas that the report suggests will probably be a spotlight is semiconductors. It forecasts manufacturing capability to extend to twenty% international market share by 2030.
Industrial automation and software program corporations are additionally anticipated to assist shorten provide chains, with elevated funding throughout synthetic intelligence, cloud computing and 5G deployment. One other core a part of the area’s plan for reshoring will probably be to safe provide partnerships.
BofA’s inventory picks for this thematic development embrace DSV [DSV.V], Maersk [MAERSK-B.CO], Siemens [SIE], AVEVA [AVV.L] and STMicro [STM], with a give attention to the transportation and logistics sector.
Structural industrial challenges to stay aggressive
Rising vitality prices throughout Europe can be anticipated to make sure areas of its industrial sector, corresponding to chemical compounds, oil and gasoline, automotive and a few energy-intensive segments, uncompetitive, BofA defined within the report.
Because of this, the financial institution believes {that a} higher give attention to various vitality manufacturing may assist to offset this. The three shares that it expects to face headwinds embrace BASF [BAS.DE], Yara [YARIY]and Outokumpu [OUT1V.HE].
Greater inflation and rates of interest
After a lengthy interval of record-low rates of interest, BofA believes that the following few years will probably be outlined by larger inflation and better rates of interest. Beneath a state of affairs of a slowing financial surroundings with no recession, it believes that banks are set to develop, generate money and redistribute it.
At current, it states, this isn’t being priced in. Conversely, actual property — one of many massive winners of the low-interest charge surroundings — will face a a lot more durable interval. Lastly, it sees vital downward stress on low-income shopper buying energy and, as such, is cautious on retail total.
Its inventory picks for this theme are NatWest [NWG] and DNB [DNB.OL], with Hammerson [HMSO.L], Inditex [IDEX] and Zalando [ZAL.DE] being extra “challenged”.
The rise of ESG
BofA additionally believes that the Russia-Ukraine battle will lead traders to reprioritise ESG investing, with a specific emphasis on governance standards. One other issue that’s anticipated to alter is corporations that manufacture weapons. It foresees weapon producers being not “no-no anymore”. Whereas the financial institution didn’t single out inventory picks for this theme, it did spotlight the vitality and defence sectors as being the 2 most primed to profit.
The seven funding themes that BofA mentioned within the report doesn’t characterize an exhaustive record of all of the structural modifications that Europe may undergo. “As an alternative, we see it as a listing of essentially the most impactful and long-lasting themes that emerged from our discussions with our analysis division.”
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