Quick Thoughts: The Implications on Equities of the War in Ukraine

We hosted a webinar to discuss equity investing against the backdrop of the war in Ukraine. The conversation was moderated by Kim Catechis, Investment Strategist, Franklin Templeton Investment Institute, and included Zehrid Osmani, Head of Long-Term Unconstrained Equities, Martin Currie, and Fred Fromm, Energy Sector Research Analyst/Portfolio Manager, Franklin Equity Group.

The discussion largely focused on energy and Europe, with the following key thoughts:  

• There is a shortage of oil globally, which explains the lack of direct sanctions on Russian oil production. The OPEC meeting this week somewhat confirmed this imbalance as it did not result in increased supply, largely because each member country other than Saudi Arabia is already running at near-peak utilization rates.   
• Energy company valuations reflect lower oil prices in the future. The futures curve for crude oil is declining, which implies that market participants see potential for production increases. In recent years, the US Permian basin has served this purpose, becoming geopolitically important as production can be ramped up quickly when shocks occur.   
• Energy transformation could accelerate, with Europe continuing to lead. As Europe aims for lower dependence on Russia for energy needs, there is a higher probability that alternatives such as solar, wind, and nuclear will grow at a faster rate.
• Russia’s share of global corporate revenues and profits is not enough to make a large impact. For example, the risk of a crisis driven by European banks is low because their exposure to Russia is de minimis. However, the slowing of economic growth in Europe due to inflationary forces is a risk.
• Equity valuations in Europe are attractive and longer-term investment themes remain in place. Relative to the United States, European equities are trading at a discount. Given this, we believe the powerful thematic forces of demographics, resource scarcity, and technology lead to opportunities in companies built for growth in sustainable living, de-carbonization, and climate change considerations. 

Understanding geopolitics has become a necessary component to investing in equity markets. The current environment is a reminder that while there are short-term investment considerations connected to geopolitics, they should be weighed against longer-term factors.