By Jules Rimmer
Europe's energy import dependency is an Achilles heel when the oil price spikes
European and emerging market stocks were comfortably outpacing their American counterparts until this weekend's sudden sudden outbreak of hostilities
Up until the outbreak of war, one of the big themes of the new year was the diversification story, of asset managers piling into international equities and emerging markets.
The Stoxx Europe 600 is now just 2% on the year as the astonishing surge in gas prices - with the main Dutch contract up some 73% - exposing a vulnerability in European economies.
The JPMorgan market intelligence team of Andrew Tyler, Federico Manicardi, Ellen Wang and Victoria Campos said they expect further underperformance of European stocks versus their American counterparts.
They said the disorderly market for gas pricing threatens the eurozone's industrial consumption. It also has an indirect impact on electricity prices. Paradoxically, JPMorgan points out, the STOXX Europe 600 XX:SXXP index might actually see upgraded earnings forecasts, owing to the weighting of oil stocks but gas is definitely an economic drag.
The question is how long the conflict drags on.
Melissa Brown, managing director of investment decision research at SimCorp, observed, &#34;Europe's advantages should still hold if the current geopolitical turmoil subsides soon.&#34; She did say that because Europe is coming out of the coldest part of the year, it will be a smaller problem.
The sudden shift in perceived European vulnerabilities is also reflected in the euro's (EURUSD) fortunes. George Saravelos, global head of currency research at Deutsche Bank, calculates that for every 10% rise in Brent and natural-gas prices, the euro falls by about 0.8%.
JPMorgan believes it could add 0.2% to the E.U.'s standardized measure of inflation, perhaps exerting pressure on the European Central Bank to raise interest rates to contain it.
The iShares MSCI Emerging Markets ETF EEMalso has come well off its highs of the year. Up as much as 16%, it's now up 7% on the year.
-Jules Rimmer
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03-04-26 0432ET

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European and emerging market stocks have underperformed following a spike in gas prices and geopolitical tensions. The Stoxx Europe 600 index is up only 2% this year, with gas prices surging 73%. JPMorgan predicts continued underperformance of European stocks compared to American ones, citing the impact on industrial consumption and electricity prices. The euro is also affected, with a 10% rise in oil and gas prices leading to a 0.8% drop in its value. The iShares MSCI Emerging Markets ETF has also declined from its highs, now up 7% for the year.

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