Europe's MSCI equity index has dropped roughly 5% since U.S. and Israeli strikes on Iran began on Feb. 28, a decline that UBS Global Wealth Management described as broadly comparable to past oil supply shocks and one it expects will reverse within 50 to 100 days.
Brent crude swung dramatically in the immediate aftermath, moving from nearly $120 per barrel to as low as $81 within two days, before trading close to $100 at the time of publication. UBS warned that in a severe scenario European economic growth could slow to 0% for a short period.
The brokerage laid out three primary reasons it believes Europe is structurally better prepared than it was during the 2022 Russia-Ukraine energy crisis.
- Limited Middle East exposure: The Middle East supplies only about 10% of Europe’s liquefied natural gas imports, equivalent to roughly 4% of total gas consumption. UBS noted that, by comparison, Russia previously supplied around 40% of EU natural gas imports, and that pipeline gas alone accounted for 35% to 40% of EU consumption before the Ukraine war. UBS said it views disruptions originating in the Middle East as temporary in nature.
- Gas price dynamics and monetary policy context: European gas currently trades near c50 per megawatt-hour, far below the 2022 spike when prices rose about tenfold in two weeks to roughly c340/MWh. UBS said central banks are less likely to respond with rate hikes this time because the shock occurs during a period of disinflation rather than the post-pandemic inflation environment that prevailed in 2022.
- Structural adaptation since 2022: Households in Europe are carrying higher savings rates than previously, and industry has adjusted. UBS highlighted that in Germany output from energy-intensive sectors has fallen 22% since the end of 2021, compared with an 8% reduction in non-energy-intensive sectors, reflecting shifts in production and gains in efficiency. Germany also has energy support measures built into its new fiscal package.
UBS implemented one change to its sector ratings: it downgraded European banks to Neutral from Attractive and closed its Global Banks theme, attributing the move to less compelling valuations and rising macroeconomic uncertainty. The bank maintained its preference for European information technology, industrials, and for Germany as an exposure.
On currency markets, UBS said the U.S. dollar is drawing safe-haven inflows. The firm warned that a further rise in energy prices could push the EUR/USD exchange rate toward 1.10 to 1.12; the pair was at 1.15 as of March 12.
In fixed income, UBS observed that a renewed sell-off in UK, Italian, Spanish, or Greek sovereign bonds could present return opportunities if inflation falls back, whereas inflation-linked bonds would likely outperform in the event that the energy shock proves persistent.
The UBS note frames the current market reaction as consistent with historical supply shocks while underscoring differences that, in the bank's view, reduce the probability of a repeat of 2022-style energy-driven stress. Still, the brokerage acknowledges that market and economic risks remain and has adjusted its positioning accordingly.