Russia is Germany’s Achilles heel

By Peter Garnry, Head of Equity Strategy at Saxo Bank

German equities are the weak spot in Europe which a higher negative sensitivity to the ongoing energy crisis and the Russia-Ukraine conflict. German equities are only 7% above their pre-pandemic level highlighting that something is structurally wrong and Germany has the wrong growth model.

Germany is in tough position over the Russia-Ukraine conflict as Germany is a large net importer of energy from Russia through oil and gas, and the Nord Stream 2 pipeline going through the Baltic Sea was meant to secure Germany’s energy needs. The unfolding energy crisis in Europe and Russia’s actions in Ukraine have exposed Germany as the weak spot in European equity markets. DAX futures were hit hard on Monday and touched new lows yesterday before rebounding on the market’s interpretation that sanctions on Russia will be milder than expected, at least for now, with Germany saying Nord Stream 2 is on hold and the UK is imposing sanctions on five Russian banks but importantly none of them being the export banks.

DAX futures are only 7% above their pre-pandemic levels suggesting the meager equity returns for shareholders of German blue chip companies. Structurally, Germany’s corporate sector is weak and the larger weight on industrial production has made Germany vulnerable to the current energy crisis. Electricity prices are not coming down and the low investments in oil and gas will continue to support elevated energy prices, and commodity prices will also remain strong leading to a potential decline in corporate profits this year in German equities. German equities have underperformed European equities over the past five years and they seem to be a good for hedging against the energy crisis (besides having exposure to energy companies) and the unfolding crisis in Ukraine.

Further reading: German equity weakness, commodities, and defence stocks

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