Skip to main content

Press release

Energy market under pressure

It is not only in Europe that gas and electricity prices are reaching record levels. What impact does this have on the financial markets and are there still interesting investment opportunities within the energy sector?

Rising energy prices = rising inflation?
The recent increase in energy prices will inevitably lead to a further rise in inflation. However, central banks around the world are taking a relaxed approach to the situation. They argue that the current spikes in inflation rates are only temporary. “For monetary policy, overcoming the slump in employment and economic activity as a result of the coronavirus pandemic is currently more important than the level of inflation,” says Dr Volker Schmidt, Senior Portfolio Manager at Ethenea. “Therefore, for the time being, high energy costs should have little impact on central banks’ interest rate decisions.” Inflation and the development of central bank interest rates are also only one factor among many for the development of long-term bond yields, he adds. An increase in long-term interest rates, e.g. for 10-year US Treasuries or German Bunds, is currently still limited thanks to the central banks’ asset purchase programmes.

Country-specific differences in dealing with high energy prices
“Generally speaking, both consumers and companies whose production relies heavily on the use of energy, have at least temporary protection against the rise in energy prices, because they have entered into longer-term contracts or hedging transactions,” explains Dr Schmidt. “The decisive factor for them will be the duration of the high-tariff energy costs, because at some point even the longest-lasting contract will expire.”

However, he adds, there are clear country-specific differences. “In Italy, Greece, and France, consumers already receive government support,” the expert elaborates. “Spain has fixed the energy prices of nationally-generated hydroelectric and nuclear power, suspended energy taxes, and thereby curtailed the rise in energy prices through government regulation. The current situation in the UK is particularly dramatic. Fertiliser manufacturer CF Industries has shut down its plants in the UK as a result of the energy crisis.” However, as one by-product of fertiliser production is CO2, which is essential for food preservation, the government stepped in and persuaded CF to resume production, he said.

How can investors benefit?
“At the moment it is difficult to keep track of which companies are benefiting from the developments and which are struggling,” says Dr Schmidt. For energy suppliers in particular, the situation is tricky. “On the one hand, utilities want to offer their customers the lowest possible competitive prices, which argues in favour of short-term contracts between utilities and electricity producers when prices are low,” the Portfolio Manager explains. “On the other hand, long-term contracts with producers are important for utilities to calculate reliably. But if a utility has hedged at too high a price level for too long, it will be overtaken by competitors who have taken short-term hedges in the event of a price drop.”

The example of the British energy supplier Green shows why it is important to thoroughly analyse individual companies when investing. “Green has capitulated due to the current regulations, which stipulate that customer contracts cannot be adjusted to current market situations. The cost of buying gas is well above the price the company is allowed to charge its end customers.” Even though Green is not represented on the capital market with either shares or bonds, this is a powerful illustration of the fact that a fundamental case-by-case analysis, as well as an understanding of the most important pricing mechanisms, is particularly important when it comes to smaller companies. At least six other energy suppliers in the UK have gone out of business in September alone because the suppliers are not also the producers of the energy.

Consequences for the portfolio
“In summary, at present, bonds issued by companies in the energy sector rarely represent an attractive investment,” says Dr Schmidt. “The owners of electricity or gas grids, for example, are not currently paying attractive risk premiums. Investors rightly consider them low-risk because their business model is scarcely dependent on changes in energy prices and they are also usually still partly state-owned.” The main risk is the potential loss of one or more customers. “The clear winners of the current energy crisis are the gas and oil exploration companies as well as the pure electricity producers, including the producers of coal-fired electricity, which are rightly criticised for sustainability reasons if they have their own coal deposits. In Germany, this only applies to producers of lignite-based electricity; hard coal has not been mined for some time, but is instead imported. At the moment, the priority of consumers and energy-consuming companies is definitely more security of supply and less about sustainability.” This is also shown by the fact that coal-fired electricity in Germany replaced renewable energies as the most important energy source during the first half of 2021.

This is a marketing communication. This document is marketing material and is for product information purposes only and is not a mandatory statutory or regulatory document. The information contained in this document does not constitute a solicitation, offer or recommendation to buy or sell units in the fund or to engage in any other transaction. It is intended solely to provide the reader with an understanding of the key features of the fund, such as the investment process, and is not deemed, either in whole or in part, to be an investment recommendation. The information provided is not a substitute for the reader's own deliberations or for any other legal, tax or financial information and advice. Neither the investment company nor its employees or Directors can be held liable for losses incurred directly or indirectly through the use of the contents of this document or in any other connection with this document. The currently valid sales documents in German (sales prospectus, KIIDs and, in addition, the semi-annual and annual reports), which provide detailed information about the purchase of units in the fund and the associated opportunities and risks, form the sole legal basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at www.ethenea.com and are available free of charge from the investment company ETHENEA Independent Investors S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. These are: Austria: ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG, Am Belvedere 1, A-1100 Wien; Belgium CACEIS Belgium SA/NV, Avenue du Port / Havenlaan 86C b 320, B-1000 Brussels; DEUTSCHE BANK AG, Brussels branch, Marnixlaan 17, B-1000 Brussels; France: CACEIS Bank France, 1-3 place Valhubert, F-75013 Paris; Germany: DZ BANK AG, Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, Platz der Republik, D-60265 Frankfurt am Main; Italy: State Street Bank S.p.A., Via Ferrante Aporti, 10, IT-20125 Milan; Lichtenstein: SIGMA BANK AG, Feldkircher Strasse 2, FL-9494 Schaan; Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; Portugal: Abanca Corporación Bancaria, S.A., Sucursal em Portugal, Rua Castilho, 20, 1250-069 Lisboa; Spain: Capital Strategies Partners, A.V., S.A., Paseo de La Castellana, 178, 3 izda. ES-28046 Madrid; ALLFUNDS BANK, S.A., C/ stafeta, 6 (la Moraleja), Edificio 3 – Complejo Plaza de la Fuente, ES-28109 Alcobendas (Madrid); Switzerland: Vertreterin: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich, Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines. Investors can obtain information about their rights from the website www.ethenea.com and from the sales prospectus. The information is available in both German and English, as well as in other languages in individual cases. Producer: ETHENEA Independent Investors S.A.. Distribution of this document to persons domiciled in countries in which the fund is not authorised for distribution, or in which authorisation for distribution is required, is prohibited. Units may only be offered to persons in such countries if this offer is in accordance with the applicable legal provisions and it is ensured that the distribution and publication of this document, as well as an offer or sale of units, is not subject to any restrictions in the respective jurisdiction. In particular, the fund is not offered in the United States of America or to US persons (within the meaning of Rule 902 of Regulation S of the U.S. Securities Act of 1933, in its current version) or persons acting on their behalf, on their account or for the benefit of a US person. Past performance should not be taken as an indication or guarantee of future performance. Fluctuations in the value of the underlying financial instruments or their returns, as well as changes in interest rates and currency exchange rates, mean that the value of units in a fund, as well as the returns derived from them, may fall as well as rise and are not guaranteed. The valuations contained herein are based on a number of factors, including, but not limited to, current prices, estimates of the value of the underlying assets and market liquidity, as well as other assumptions and publicly available information. In principle, prices, values, and returns can both rise and fall, up to and including the total loss of the capital invested, and assumptions and information are subject to change without prior notice. The value of the invested capital or the price of fund units, as well as the resulting returns and distribution amounts, are subject to fluctuations or may cease altogether. Positive performance in the past is therefore no guarantee of positive performance in the future. In particular, the preservation of the invested capital cannot be guaranteed; there is therefore no warranty given that the value of the invested capital or the fund units held will correspond to the originally invested capital in the event of a sale or redemption. Investments in foreign currencies are subject to additional exchange rate fluctuations or currency risks, i.e. the performance of such investments also depends on the volatility of the foreign currency, which may have a negative impact on the value of the invested capital. Holdings and allocations are subject to change. The management and custodian fees, as well as all other costs charged to the fund in accordance with the contractual provisions, are included in the calculation. The performance calculation is based on the BVI (German federal association for investment and asset management) method, i.e. an issuing charge, transaction costs (such as order fees and brokerage fees), as well as custodian and other management fees are not included in the calculation. The investment performance would be lower if the issuing surcharge were taken into account. No guarantee can be given that the market forecasts will be achieved. Any discussion of risks in this publication should not be considered a disclosure of all risks or a conclusive handling of the risks mentioned. Explicit reference is made to the detailed risk descriptions in the sales prospectus. No guarantee can be given that the information is correct, complete or up to date. The content and information are subject to copyright protection. No guarantee can be given that the document complies with all statutory or regulatory requirements which countries other than Luxembourg have defined for it. Note: The most important technical terms can be found in the glossary at www.ethenea.com/glossary Information for investors in Switzerland: The country of origin of the collective investment scheme is Luxembourg. The representative in Switzerland is IPConcept (Schweiz) AG, Münsterhof 12, P.O. Box, CH-8022 Zurich. The paying agent in Switzerland is DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zurich. The prospectus, the Key Investor Information Document (KIID), and the Articles of Association, as well as the annual and semi-annual reports, can be obtained free of charge from the representative. Copyright © ETHENEA Independent Investors S.A. (2021) All rights reserved. 19/10/2021