Russia is a major supplier of oil to the European Union, and crude prices have been around their highest for seven years. In the absence of a quick de-escalation of tensions, prices will stay high for the time being, Barclays says in research on Feb 16. That is likely to benefit suppliers of oil from alternative sources such as Africa.
Equinor, Shell and TotalEnergies are among obvious winners, Barclays says. Miners such as BHP, Anglo American and Rio Tinto also tend to perform better when oil rises, while Barry Callebaut and Nestlé are among consumer stocks operating in Africa which stand to lose.
Barclays prefers energy shares as protection against geopolitical risk, and is also overweight in industrials. The bank provides a list of share performance correlations with the oil price. Companies which draw part of their resources from Africa have some of the highest correlations.
- Equinor, which counts Angola among its main sources of oil, has the highest correlation of stocks covered by Barclays with 45%.
- BHP, which in January announced an investment of $100m in a nickel project in Tanzania, is the miner with the highest oil correlation at 39%.
- That puts it slightly ahead of Shell on 38%, and TotalEnergies on 37%.
Anglo American, which has mines in South Africa, Botswana, Zimbabwe and Namibia, has a correlation of 33%.
- Rio Tinto, which owns the majority of South Africa’s largest mineral sands producer Richards Bay Minerals, has a correlation of 24%.
- Barry Callebaut and Nestlé, which both source cocoa from West Africa, are among likely losers as their stock prices have large negative correlations with oil. Barry Callebaut has a negative correlation of 26%, while Nestle is on a negative 24%
Higher oil would mean higher-for-longer inflation, which would likely mean more of a constraint for international investors in African risk assets. But a possible conflict in Ukraine is “not new news” and much of the risk of invasion has already been priced in to global equities, Barclays argues.
Past equity market declines in times of military conflict have tended to be short-lived, it says, citing the recoveries that took place after the Gulf War, the 9/11 attacks, the Iraq War and Russia’s annexation of the Crimea. Energy and defensives shares usually fared the best during conflicts, Barclays says, while cyclical stocks tended to lead the recoveries.
Barclays is confident that is the most likely pattern now. The bank points to the AAII investor sentiment survey, which in mid February saw the proportion of bullish investors fall to 19.2, its lowest since May 2016.
- The AAII index has only fallen below 20 on 31 occasions since 1988, or 1.7% of the time, Barclays says.
- Equities bounced back strongly each time, with the single exception of the 2008 global financial crisis.
History suggests the balance of risks is currently tilted in favour of shares in Africa’s biggest oil and mining operators.
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