Davide Chiantore on Market Trends, Conflicts and Renewables

Davide Chiantore – Abalone Solitaire

Since the beginning of the conflict between Russia and Ukraine to date, the situation has been deteriorating and there seems to be no chance of a peace agreement, at least in the short term.
This situation of fear is creating a certain amount of apprehension among investors in Europe and beyond, and so there have been heavy declines and increased volatility on the Eurozone markets, but above all a worsening of the inflationary situation, which was already present before the start of the war.
The main reason for the tensions is actually to be found in the increase in inflation, as the Russian-Ukrainian conflict has accentuated inflationary pressures given the difficulty in supplying certain raw materials such as fertilisers, the increase in the cost of energy, the increase in the cost of gas, which is currently at an all-time high, and the increase in the cost per barrel of oil, which are increasing the rise in inflation.
The US is experiencing record inflation and Europe is following suit. This trend unfortunately does not seem to be coming back, at least in the short term, so the Central Banks have had to start making shock interventions on the rate front to the extent that the Fed has had to raise rates to 50 basis points.

The Russia-Ukraine situation is creating volatility in European energy prices for both electricity and gas and oil. At the moment, Europe is heavily dependent on Russian supplies, and efforts are being made to find ways to reduce this dependence as soon as possible.
The European Union would have the opportunity to achieve energy independence in the medium to long term through renewable energy sources.
As far as the war is concerned, Russia despite having some difficulties, at the same time Putin cannot back down because he would risk too strong internal tensions and above all risk a coup.
On 9 May, Putin made a relatively peaceful speech and this could indicate that there are great difficulties internally to relaunch and escalate this war further.
Similarly, Zelensky, in Ukraine, cannot give too big concessions to the Russian invader because he would in turn risk an uprising on the part of his generals and the Ukrainian army, which is extremely combative and convinced that it can win against the Russians.
The situation is undoubtedly tense, as evidenced by the volatility on the European markets, the drowdown in the indices of the major stock exchanges is a concomitant of what is happening both on the geopolitical tension front but also on the inflationary front.
In the United States, inflation does not seem to be slowing down, and this is mainly due to a shortage of electronic components that has been going on for more than a year. The lockdowns in China are not helping this situation; in fact, some cities such as Beijing and Shanghai, which are important production centers, are having a strong impact on industrial production and consequently on Chinese exports to Europe and the United States.

The prices of European companies and markets at the moment are at a discount to those in the US precisely because they have a greater geopolitical risk and a greater risk of war and extension in this Russian-Ukrainian conflict.
We think that some companies right now have extremely attractive valuations but precisely because they incorporate the risk of war and escalation of this conflict.
The Central Banks have a very difficult task, the Federal Reserve seems to be more aggressive at this stage with regard to raising rates, while the European Central Bank is well aware that it has to move on the “tax” front because we have very high inflation and at the same time there are new tensions on the sovereign debts of non-core countries, for example in Italy, Portugal and Spain the spreads are widening significantly in terms of yields on government bonds, and for the first time in many months the yield differential between Italian and German yields has exceeded 200 basis points, which is a threshold considered alarming.