Weekly Brief: Between A Rock And A Hard Winter

Weekly Brief: Between A Rock And A Hard Winter

over 1 year ago3 mins

Facing an unprecedented energy crisis, countries across Europe and the UK are drafting plans to help consumers and businesses. The consequences will be hard and the costs high.

🕰 Recap

  • In February, Russia launched a full-scale invasion of Ukraine
  • That put the brakes on Europe’s easy access to Russian energy and sent the price of oil and gas rocketing
  • Those high prices helped stoke record inflation across Europe this summer
  • And with energy prices set to rise higher still, the UK announced a plan to help keep people’s costs under control

✍️ Connecting The Dots

When Russia invaded Ukraine, the hope was that it’d be a short-term, failed endeavor, that economic sanctions would swiftly pressure Russia to stand down, and that energy prices would fall back to normal levels. That didn’t happen: the war rages on and after maintenance on the key pipeline from Russia threatened Europe’s gas supply, the taps were ultimately turned off.

With truncated supply, energy prices are already higher. And with winter approaching, rising demand means they’ll likely go higher still. Energy’s a pretty non-negotiable cost: you need it to heat your home, to cook, and to charge your phone (maybe even your car). And businesses literally need to keep the lights on for their workers and customers. People are at risk of not being able to pay their bills and companies are at risk of going bankrupt…

Enter governments: some in Europe have been on the front foot, with Germany putting up about $100 billion in support so far. But Europe’s hoping to do more: countries are discussing a potential limit (or price cap) on what they’d pay for Russian energy, which’d help countries balance the books better and offer people some certainty. The UK’s gone a step further: last week, it announced plans to pay the difference between consumers’ current energy costs and whatever they rise to over the next 18 months, essentially capping their energy bills. Some $170 billion of new borrowing has been earmarked to pay for this, but the actual cost could prove much higher if energy prices continue to climb.

🥡 Takeaways

1. A negative, self-reinforcing, spiral could begin.

There’s a big risk economists might be watching for, and you can too. See, governments will be spending to help cover consumer and business energy costs, and to do that, they’ll be selling bonds to investors. The higher interest rates of the day will mean governments will face steeper debt costs than, say, a year ago. And what’s more, new bonds will increase the amount out there, meaning there’s more debt in the market – and more compared to the size of the shrinking eurozone and UK economies. That’ll likely give investors pause about buying in – others might ditch the bonds altogether – and that could weigh on the value of the euro and British pound.

2. If you can’t beat them, buy them.

You mightn’t be able to bring your own heating costs down, but you might be able to offset them with some investing activity. For instance, there are countless natural gas exchange-traded funds whose price tracks that of natural gas, allowing you to potentially profit if prices rise. A broader bet could be on the energy sector overall: the iShares U.S. Oil & Gas Exploration & Production ETF (ticker: IEO; expense ratio: 0.39%) or iShares Global Energy ETF (IXC; 0.40%) are two places to start. And, though picking individual stocks is much riskier, there are a handful of renewable energy companies that could benefit from the new energy order. Keep in mind, though: many investors are well aware of the potential opportunity here, and share prices will likely already reflect that.

🎯 Also On Our Radar

A fresh report from Oxford Economics forecasts that China’s economy will grow 4.5% a year on average this decade, and then slow to around 3% between 2030-40. What’s more, the economic advisory group thinks China’s more likely to fall short of those forecasts than exceed them, because of demographics, tensions with the US, and the risk of an enduring real estate slump.



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