Global Market | European companies better positioned to withstand energy price shock than in 2022: Analysts

European companies are better positioned to withstand the latest surge in oil and gas prices than they were during the energy crisis of 2022, as changes in stock market composition, improved risk management and robust artificial intelligence-related spending help cushion the impact.

Rising energy prices have renewed concerns about Europe's dependence on imported fuel and the potential consequences for businesses and consumers as winter approaches. However, investors say listed companies are in a stronger position than in 2022, when Russia's invasion of Ukraine sent natural gas prices soaring, fuelling recession fears and concerns about the competitiveness of European industry.

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Energy costs pose limited direct threat

The immediate impact of higher energy prices on many large European companies remains manageable, with consumers and smaller businesses likely to bear a greater burden because they have fewer options to diversify their energy supplies, according to Ciaran Callaghan, head of European equity research at Amundi.

Chemicals, materials and airlines remain among the sectors most exposed to higher fuel and power costs. However, Morgan Stanley estimates that direct energy expenses account for only a low single-digit share of costs for many industrial companies.

Deutsche Bank estimates that energy costs represent about 1% of sales for companies in the STOXX 600 index, suggesting that many listed businesses can absorb an initial increase in energy prices without a significant hit to profitability.

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Changing index composition provides a cushion

The composition of European equity markets has shifted towards sectors that can benefit from higher energy prices and the inflationary environment.

Sectors that stand to benefit from higher energy prices account for 36% of MSCI Europe earnings, compared with around 6% generated by sectors considered vulnerable, according to Morgan Stanley, Reuters reported.

Energy companies, utilities and banks are among the potential beneficiaries. Their combined share of European index market capitalisation has increased to 25% from 16% five years ago.

Energy-intensive industries, including chemicals, steel and autos, now account for a smaller proportion of European equity benchmarks, while banks have gained weight. Banks can benefit from higher interest rates that often accompany periods of elevated inflation, although the impact varies with funding costs, credit quality and economic conditions.

Thomas O'Hara, investment director for European equities at GAM Investments, said European markets and companies had become more experienced in managing inflationary pressures caused by higher energy costs.

AI spending supports corporate earnings

Investment linked to artificial intelligence is providing another source of support for European corporate earnings, helping offset some of the pressure from rising energy prices.

Callaghan said the AI investment boom was benefiting European industrial and technology suppliers, with increased spending on infrastructure and related equipment providing a counterweight to the energy shock.

Direct beneficiaries of AI-related capital expenditure account for about 8% of MSCI Europe earnings, according to Morgan Stanley.

The extent to which this spending can offset higher energy costs will depend on the persistence of the investment cycle and how widely its benefits spread across European companies.

Global operations reduce exposure to Europe

The international footprint of European listed companies also limits their direct exposure to domestic economic conditions.

European companies are not necessarily a reflection of their home economies because many generate significant revenue from overseas markets, said Gilles Guibout, head of European equities at BNP Paribas Asset Management.

Goldman Sachs estimates that Europe accounts for 42% of the revenue generated by STOXX 600 constituents, highlighting the importance of international markets to corporate earnings.

Many businesses have also moved production closer to end-markets and diversified supply chains, helping reduce their vulnerability to regional cost increases and supply disruptions. However, international operations can expose companies to currency movements, geopolitical risks and higher costs in other markets.

Companies have learned from the 2022 crisis

European businesses have spent the past four years strengthening supply chains, improving procurement contracts and developing better ways to manage inflation shocks, according to O'Hara of GAM Investments, Reuters reported.

Europe has also expanded liquefied natural gas imports, developed alternative supply routes and increased the use of energy hedging, renewable power and energy-efficiency measures.

Energy risk management has become a structural part of corporate operations rather than a response activated only during a crisis, said Mario Montagnani, senior investment strategist at Vontobel, Reuters reported.

The experience gained since 2022 could help companies respond more effectively to renewed volatility in energy markets, although the degree of protection varies across industries and individual businesses.

Goldman Sachs data cited by investors show that, since the Iran war began in February, earnings estimates have been revised upwards across sectors other than consumer-related industries, indicating that corporate profit expectations have remained relatively resilient despite the energy shock.

Prolonged price surge could still hurt

Despite these buffers, investors warn that European companies cannot remain insulated indefinitely if oil and gas prices stay elevated.

Markets may be underestimating the risks associated with a prolonged period of high energy prices, said Anthony Penel, European equities manager at Edmond de Rothschild Asset Management.

If elevated oil and gas costs persist into 2027, the impact could spread beyond direct energy expenses, feeding into broader inflation, raising borrowing costs and weakening consumer demand.

Higher fuel and electricity bills could squeeze household budgets, while businesses may face pressure from rising transport, production and financing expenses. Companies could initially absorb some of these costs, but sustained increases may eventually force them to raise prices, accept lower margins or scale back investment.

Europe's listed companies have strengthened their defences since the 2022 energy crisis, but their resilience will ultimately depend on how long energy markets remain under pressure and how severely higher costs affect the wider economy.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)