Russia has disrupted the flow of gas through the Nord Stream pipeline for 10 days for scheduled maintenance. This company is the main gas import infrastructure in Europe. For this reason, governments are nervous about the possibility that Russia will take the opportunity to turn off the taps permanently. Consequently, it may only be a matter of time before it does the same for other key gas pipelines. But although the measure would have important consequences for consumers, the economy and for investing in stocks, there is a way to protect our portfolios.
What if Russia shut down the gas pipelines?
About 35% of European gas consumption comes from Russian imports, mainly through three gas pipelines:
- Yamal (via Belarus and Poland)
- Brotherhood (via Ukraine)
- Nord Stream (under the Baltic Sea)
If Russia permanently disrupts the Nord Stream flow and follows similar measures on the other two pipelines, gas prices will skyrocket from their already high levels, which in turn would drive up household gas bills and, Ultimately, it would hurt consumer spending. Germany and Italy, highly dependent on Russian gas, would be especially affected. Goldman Sachs estimates, for example, that the energy bill of Italian households would rise by 65% compared to current levels, up to almost 500 euros per month. This represents an increase of almost 300% compared to just two years ago.
Goldman Sachs estimates that German and Italian gas-intensive industries (chemicals, glass, paper, steel, cement, ceramics, etc.) could produce 65% and 80% less due to lack of affordable gas. This would directly affect industrial activity, a key factor for both economies. This lethal combination of consumer spending and industrial production is a reflection of what would happen throughout Europe. It would almost certainly trigger a recession in the region. That is likely to cause our stock investment to plummet.
How can we protect our investment in stocks?️
We can short the investment in European stocks, of course, but the gas situation is not the only factor that influences the success of this trade. We can make a trade where we can profit specifically in the event that gas flows Russian currency to stop completely, which would offset the losses in our portfolios. To do this, we can carry out an operation to invest in shares of the energy sector long and short. We can make an investment in stocks that benefit from a complete shutdown of Russian gas flows and invest against those that would not, and pocket the difference between both. On the long side of the trade, we must look at the investment in renewable energy stocks. These will become increasingly important to reinforce energy security. Wind and solar farms are also going to become more popular with governments. They have a deflationary effect on electricity prices, since their production costs are marginal. Among the large European promoters of renewable energy that will benefit from this are RWE, EDP Renewable y Power up Energy.
Regarding short-term operations, there are two groups of investments in company shares that are more risky:
- Investing in shares of distribution companies that sell gas to suppliers at fixed prices: They are contractually obligated to lock in any gas shortfalls on the spot market at much higher prices, and could suffer significant trading losses as a result. The most notable company is Uniper, which is already facing this dynamic.
- Investing in shares of energy providers: Companies that sell electricity and gas directly to consumers will be hit by a combination of demand destruction and customer defaults as their prices rise. Among the companies that will have to apply the largest price increases are EON, Engie y Enel, located in Germany, France and Italy, respectively.
We could structure our buying and selling strategy simply by equalizing between the two sides and the investment itself in individual stocks to be able to take advantage of the different directions that investment in European stocks can take:
