Morgan Stanley says European equities remain exposed to tactical risks as geopolitical tensions rise, and the brokerage has reiterated its preference for defensive stocks rather than cyclical names as oil price sensitivity reshapes sector performance.
In a note released Tuesday, Morgan Stanley mapped five episodes of materially elevated geopolitical risk since 1990 using the Geopolitical Risk (GPR) index. The bank divides these episodes into two patterns: prolonged periods of uncertainty lasting more than 14 weeks, and short-lived escalations under three weeks.
Three of those prolonged episodes - the Gulf War, the Iraq War and Russia’s full-scale invasion of Ukraine - saw uncertainty endure beyond 14 weeks. During those stretches European equities experienced an average peak-to-trough correction of 24% over roughly 26 weeks. In those same prolonged episodes, cyclicals underperformed defensives by about 17% on average while oil rose roughly 38%.
The remaining two episodes were markedly shorter. The Sept. 11, 2001 attacks and a 12-day Iran-Israel conflict in 2025 produced peak-to-trough market declines of 15% and 3% respectively, with both episodes resolving in under three weeks.
Since mid-February, Morgan Stanley notes that cyclicals have underperformed defensives by 6 percentage points. The bank shifted sector preference toward defensive stocks earlier in February, a move it initially attributed to disruption risks from artificial intelligence; Morgan Stanley says the present geopolitical environment reinforces that stance.
On March 2, Energy, Defence and Tech Hardware were the only sectors to close in positive territory, while most laggards were cyclical sectors. Based on Morgan Stanley’s chosen reference period of March 2022 - when correlations between equities and oil prices shifted significantly following Russia’s invasion of Ukraine - Airlines, Autos, Banks and Luxury exhibit the most negative correlations with oil prices. Energy, Metals & Mining and Defence show the strongest positive correlations.
The set of stocks most positively correlated with oil has outperformed the least correlated group by 12% since mid-December, a pattern Morgan Stanley calls a "material move but below 2022 levels." Within the top 50 MSCI Europe names that show the highest positive correlation to oil prices, Shell, Galp Energia and Equinor led the list, with three-month daily correlations of 72, 69 and 68 respectively as of March 2022 data.
At the opposite end of the spectrum, Amundi, Renault and Skandinaviska Enskilda Banken displayed the most negative correlations, with readings of 58, 50 and 47 respectively.
European gas prices have also risen sharply, with TTF gas prices spiking in early 2026. Morgan Stanley reports that sector sensitivities to TTF gas prices broadly mirror those to oil, with Energy and Defence again on the positive side of correlations and Banks and Autos toward the negative side.
Looking to precedent, Morgan Stanley highlights the Iraq War in 2003 and Russia’s 2022 invasion as the clearest examples of protracted uncertainty. European equities sold off ahead of the Iraq War and reached a trough just before the conflict began. Following Russia’s invasion, markets experienced a sharp recovery which ultimately proved unsustained.
On the implications for market dynamics, Morgan Stanley cautioned that "when uncertainty lingers, the recovery phase is often delayed," and that during prolonged uncertainty there is "scope for further relative downside in cyclicals."
Market context and takeaways
Morgan Stanley’s analysis links elevated geopolitical risk with sustained volatility, commodity-driven sector rotation and a tendency for defensives to outperform during extended uncertain periods. The brokerage’s sector preferences and its correlation analysis underline how oil and gas price swings can reconfigure returns across Energy, Metals & Mining, Defence and several cyclical sectors.