European economies are directly exposed to any disruption of Russian fuel flow. That’s why foreign developed markets are lagging the S&P 500 by 3 percentage points this year . . . and why the euro has slumped to parity with the dollar.
That’s a disaster for their importers. They’re importing energy. Every joule they bring in costs them more.
They need to keep the lights on. They will. And then exchange rates will start working on the side of their exporters.
Europe is luxury. It’s the equivalent of Silicon Valley there. Yes, Airbus SE (EADSY) is a world-class company at roughly $95 billion in market capitalization. But Hermes International (HESAY) is significantly bigger. Scarves evidently beat jets in the French market.
And then L’Oreal (LRLCY) weighs in at roughly double Hermes . . . while LVMH Moet Hennessy Vuitton SE (LVMUY) is easily as big as both of its rivals put together.
While German companies tend to aim a little lower in the Russian market, a trade embargo hurts Adidas AG (ADDYY) and Puma SE (PUMSY), Porsche Automobile Holding SE (POAHY) and Mercedes Benz Group (DMLRY).
Meanwhile, Germany relied more than most on Russian gas to keep the lights on in its factories. Berlin is working overtime to line up new supplies, but it’s going to cost them.
These are big economies. Their vulnerabilities will fester across borders while corporate leadership pivots away from lost Russian customers.
Western Europe accounts for over 60% of global portfolios like the MSCI EAFE ETF (EFA), even though you’re also getting exposure to developed Asian economies and Australia. The biggest holding of EFA is Nestle SA (NSRGY), which says it all, really.
If it gets cold for European consumer stocks in the next few months, EFA is going to have a hard time being anything but dead money. Don’t consider this a safe haven.
There are great companies in Europe . . . but you can buy them on their own, and might not need to do it immediately. Think Big Pharma like Sanofi SA (SNY).
Think Big Oil. Yes, there are oil stocks in Europe. TotalEnergies SE (TTE) has been hit hard by the general Euro backlash, but will rebound faster when the French realize they need energy independence.
Eni SpA (E) is also worth buying on dips. Are these stocks we tend to associate with Europe? Maybe we should start associating the future of Europe with these stocks.