Europe Almost Overcoming Its Energy Crisis
Europe has almost resolved its energy crisis brought about by the Russia-Ukraine war, judging by the steep fall in electricity prices. The UK has made a policy U-turn and relented on tax cuts for top earners. Recent panic selling has brought valuations for S-REITs to attractive levels and bargains have emerged. Our bottom-up and diversified BUY picks are CLAS (Target: S$1.29), FCT (Target: S$2.56), LREIT (Target:
S$0.91), MINT (Target: S$3.12) and MLT (Target: S$1.94). Maintain OVERWEIGHT.
• Germany almost overcoming blackmail by Russia. Germany plans to reduce its reliance on imports of natural gas from Russia from 55% to 10% by 2024. It has sourced imports of LNG from the US and natural gas from other European countries, such as Norway. Germany has signed an agreement with Qatar to expand trade in LNG. It has expedited the construction of five floating LNG terminals, which are targeted to be completed by Dec 22. Germany has ramped up the supply of electricity from coal-fired power stations. It has put two out of the three nuclear power stations due to shut down by end-22 on standby. Germany has also stepped up investments in renewable energy.
• Europe is prepared for winter. EU states have voluntarily cut their gas usage by 15% since Aug 22. Germany’s stockpile of natural gas in storage tanks has hit 85% as of Sep 22. On an EU-wide basis, gas reserve has reached 80% of total capacity, two months ahead of the target set for 1 Nov 22. Europe is able to sail through winter without rationing if the forecast of mild weather materialises. The prices of electricity in Germany have collapsed by two thirds to €187/MWh, compared with the peak of €683/MWh set in Aug 22.
• UK made fiscal policy blunder. Chancellor Kwasi Kwarteng unveiled a £45b mini budget on 23 Sep 22, comprising unfunded cuts in corporate tax, income tax, stamp duty and national insurance. Separately, the government will be spending £150b to subsidise energy costs for businesses and consumers. The expansionary fiscal policy undermines Bank of England’s (BOE) efforts to tighten monetary policy. The violent sell-down in gilts caused margin calls and a liquidity crisis for pension funds, which triggered emergency intervention by BOE to purchase long-dated gilts.
• Anxiety abated after policy U-turn. Chancellor Kwasi Kwarteng made a humble tactical retreat and removed the dreaded cut in top rate for income tax from 45% to 40%. To shore up confidence and reassure financial markets, he will be bringing forward the announcement of his five-year plan to reduce government spending and lower public debt. Fortunately, the financial turmoil was confined to the UK.
• Euro hurt by Russia-Ukraine war. The Euro depreciated 13.8% against the US dollar and 8.7% against the Singapore dollar on an ytd basis. Yield for 10-year German Bund surged 57bp to 2.08% in Sep 22. According to UOB Economics & Markets Research, EUR Refinancing Rate is expected to hit 1.75% by end-22, compared with current 1.25%.
• Pound sterling hurt by untimely pursuit of supply-side reforms. The pound sterling plummeted 15.6% against the US dollar and 12.6% against the Singapore dollar on a ytd basis. Yield for 10-year UK gilts surged 129bp to 4.17%. BOE is expected to respond to the government’s expansionary fiscal policy by jacking up interest rates. According to UOB Economics & Markets Research, GBP Repo Rate is expected to hit 4.25% by end22, compared with current 2.25%.