Yes, but the level of threat varies across asset classes. Higher oil prices are likely to slow economic growth and weigh on corporate profits across many regions, but more so in countries that are large energy importers, where the energy intensity of growth is highest and where governments have the fewest resources to cushion the impact. Higher oil prices will also add to elevated inflation pressures in some countries, reducing the ability of central banks to use monetary policy to stimulate growth. Overall, we view high oil prices as another headwind for expensive growth stocks and potentially European markets, which are more exposed via their reliance on Russian energy exports.
Brent crude prices have risen over 30% year-to-date, building on a 50% gain in 2021. The Russian invasion of Ukraine has been the main catalyst, but oil markets had been tight well before this event. OPEC+ has been slow to restore the nearly 10 million barrels per day of production it cut during the early stages of the pandemic, and US and European producers have been slow to boost output, given shareholder pressure to focus on returning capital. Meanwhile, demand is back to near historical peaks as cash-flush consumers emerge from COVID-19–related lockdowns.
The US economy is somewhat insulated from rising oil prices given exports of crude oil roughly match imports. Rising gas prices and energy bills may impact consumption, but most US consumers have a cushion to absorb these costs, thanks to recent wage gains and elevated household savings. This said, there is a difference between the US economy and its stock market. Higher oil prices will impact sectors differently, and oil supply shocks have historically boosted shares of energy companies, while consumer discretionary and staples stocks have underperformed. Rising input costs (and wages) may cause record US profit margins to come down, and richly valued growth stocks seem especially vulnerable as higher interest rates reduce the value of future earnings.
Eurozone activity is more vulnerable to higher commodity prices for several reasons. The region is highly reliant on imports to meet primary energy needs (importing more than 90% of its daily crude oil consumption and more than 80% of its natural gas). The Eurozone is also closer to Ukraine, and the war’s impact on consumer and business confidence has been pronounced. Economic growth forecasts are being slashed, though there are offsets that include an expected post-pandemic reopening bounce and potentially more spending on energy transition. Unchallenging valuations (e.g., a forward price-earnings ratio that’s more than 30% lower than the US equivalent) may underpin local equities. Still, earnings forecasts seem vulnerable in the months ahead, especially if (as seems likely) the war becomes protracted, and historically high inflation continues to hurt confidence.
China is the world’s largest oil importer and higher oil prices will impact growth. While lockdowns have reduced oil demand, in early 2022, China was still importing almost 11 million barrels per day. Chinese growth was already under pressure from a slowdown in the property sector, a crackdown on technology companies, and pandemic-related shutdowns. Recently, authorities have acknowledged mounting growth headwinds and eased some policies, and they retain more fiscal and monetary fire power to offset a commodity-related squeeze as they deployed less stimulus during the pandemic. Related to this fact, Chinese inflation levels have been far lower than those seen in the United States or Europe, in part, due to its strong currency. Chinese equity pricing offers a deep discount to reflect these challenges as local shares have dramatically underperformed in recent months.
As noted in a recent CA Answers, we are reluctant to recommend significant portfolio changes due to the war in Ukraine or building price pressures in the oil market. Still, we would be remiss not to acknowledge there will be relative winners and losers from higher oil prices in terms of geographies and sectors. Generally speaking, higher inflation and discount rates should favor value stocks over growth, particularly in regions (e.g., the United States) where margins for growth-oriented sectors like information technology are at all-time highs.