- Inflation has hit 40-year highs and oil prices are soaring as the Russia-Ukraine crisis worsens.
- Morgan Stanley recommended investing in European energy stocks, which are currently delivering historic returns.
- Insider breaks down the bank’s top six picks from the sector.
Prices are soaring at a 40-year high of 7.5% and western powers are worried that Russia could be set to invade Ukraine at any moment. Some investors are questioning whether these factors could cause a stock market crash.
But financial institutions including Bank of America, RBC, and now Morgan Stanley have all backed one sector – energy – as a solid defensive investment where stocks can still perform strongly. In its latest research report, Morgan Stanley has focussed on how the major companies in the UK and continental Europe performed in the fourth quarter of 2021.
“Europe’s oil & gas majors have finished a historic year,” a team led by Morgan Stanley’s chief commodities strategist Martijn Rats said. “Free cash flow reached a record high, balance sheets are de-gearing fast, shareholder distributions are on the rise and energy transition plans are crystallizing.”
Energy stocks are up around 26% year-to-date in 2022 – but the combination of high inflation and geopolitical tensions could mean that the sector will continue to perform strongly. Commodities like oil, gold, and copper tend to perform well during high inflation because of their strong correlation to the price of finished goods.
Morgan Stanley also noted that soaring commodity prices will provide an additional boost for energy stocks. Oil is up 21% to just over $93 per barrel so far this year at its highest since late 2014, and Rats’ team predicted it will pass $100 by the third quarter of 2022.
“The last quarter of the year can often be somewhat noisy, but even if that was the case in an underlying sense, it was overpowered by the sheer magnitude of the commodity price tailwind,” they said. “The five European majors generated net income of $23.7 billion – an all-time high.”
Morgan Stanley raised its price targets for four European energy stocks, and recommended adding two others to a portfolio based on their long-term investment strategies. Insider breaks down those stocks below, sorted by total market cap :