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Based on Fisher Investments Canada’s research, markets are both forward-looking and adaptive. In our view, equities’ reaction to Europe’s energy crunch following Russia’s invasion of Ukraine in late February 2022 provides a vivid case study in how they work. We think understanding this may be instructive for investors.

An example of how markets look forward is the MSCI European Monetary Union (EMU) Index peaked on Jan. 5, 2022, nearly two months before the Russia-Ukraine war began.1 Even before the invasion, many observers in financial publications that Fisher Investments Canada reviews discussed the risks to global energy supply as Russia throttled natural gas flows to Europe and massed troops on Ukraine’s border. This came on top of already elevated prices tied to slack wind power production in the autumn of 2021.2 Our analysis suggests markets pre-priced Russian supply risks as Brent crude oil shot up from $70 per barrel in December to $100 on the eve of war.3

Opinion and speculation about Russia’s intentions with Ukraine – and potential economic consequences for Europe and the world – ran rampant among commentators that Fisher Investments Canada reviews. We don’t think it is a coincidence that, as uncertainty spiked, eurozone equities fell 12.5 per cent from early January’s high to invasion day.4 At that point, this was a correction: a sharp, sentiment-driven 10-per-cent to 20-per-cent decline. If tensions eased then, that might have been the end of it. Hypotheticals can’t be proven, though, and short-term moves can occur for any or no reason, in our view.

But after the market’s preliminary response in the run-up to the fighting, we think European equities priced a bigger scale of economic impact as Russia cut energy supply in response to EU sanctions. Many financial publications that Fisher Investments Canada reviewed warned an energy crunch would lead to deep recession (widespread economic contraction). It also appeared to us European markets priced this in rapidly. The MSCI EMU Index hit bear market territory (a typically prolonged, fundamentally driven decline exceeding 20 per cent) on March 8, 2022, as Brent spiked to $133 amidst initial worries Western sanctions might keep Russian oil off global markets completely.5

Through the summer and into the fall, questions surrounding European natural gas supply mounted, according to our observations. Dutch TTF gas prices – Europe’s benchmark – soared to €339 per megawatt hour (MWh) on Aug. 26 from €89 pre-invasion as Russia cut flows to Europe.6 Economists we follow argued shortages and rationing would permanently shutter factories across the continent.7 Concerns about energy supply, inflation and interest rates fed into recession forecasts in financial headlines we monitored. Pre-pricing the potential likelihood, in Fisher Investments Canada’s view, the MSCI EMU Index fell 24.8 per cent on Sept. 29 from its early-January peak.8 Late last year, after the market decline, a survey from The Conference Board showed 99 per cent of chief executive officers expected a European recession in 2023.9

Since their low, though, eurozone equities have risen 25.2 per cent through January’s end.10 As uncertainty has fallen, the emerging reality has turned out to be less dire than the consensus projected.11 On the energy front, Russian oil has found buyers in India and China, blunting the impact of Western sanctions and keeping global supply and demand roughly in balance.12 Europe’s gas storage levels, increasingly filled by non-Russian supplies, have remained above their targeted 80-per-cent capacity since August.13 As for recession, economists we follow have been revising their gross domestic product (GDP, government-estimated economic output) projections upwards as economic conditions don’t appear to be as poor as earlier estimated.14 Q4 eurozone GDP rose 0.1 per cent quarter over quarter (q/q), defying consensus forecasts for contraction.15 Adjusted for inflation, eurozone manufacturing hit record-high levels in September and continued growing on a year-over-year basis through November, the latest data available as we write.16 Forward-looking equities moved ahead of these developments in our view.

Fisher Investments Canada’s reviews of markets found people, faced with dire potential outcomes and costs made adjustments. For example, thanks in part to Europe’s speedy infrastructure build to meet its energy needs without Russian supply, Dutch TTF gas prices have dropped to €57 per MWh – well below preinvasion levels.17 We think this improvement, and others like it, suggest an increasing likelihood the eurozone economy may avoid recession. From our perspective, the market’s price signals guided Europe’s adaptation efforts, averting worst-case scenarios. We don’t know if late September will be the bear market’s trough but, to us, forward-looking equities have a good grasp of an economic downturn’s likely extent at this point.

Our research shows equities move before data confirm the economy is better (or worse) than anticipated. In Fisher Investments Canada’s experience, equities assess an approximately three- to 30-month time horizon – closer to the near end when big, unexpected developments affecting the global economy, such as major conflicts and pandemics, cloud the longer-term outlook. But as those become priced in and initial uncertainty fades, we think equities can look further ahead toward the far edge of how reality likely conforms with what markets reflect.

Based on Fisher Investments Canada’s reviews, investors can benefit from knowing what drives markets and why. Markets don’t see good and bad developments per se, in our view, but positive or negative surprise over the foreseeable future against what they have already priced in.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

Fisher Investments Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.


1Source: FactSet, as of 6/2/2023. MSCI EMU return with net dividends, 5/1/2022. Presented in euros. Currency fluctuations between the euro and the Canadian dollar may result in higher or lower investment returns.

2Source: FactSet and WindEurope, as of 14/2/2023.

3Source: FactSet, as of 6/2/2023. Brent crude oil per barrel (in dollars), 20/12/2021 – 23/2/2022.

4Source: FactSet, as of 6/2/2023. MSCI EMU return with net dividends, 5/1/2022 – 24/2/2022.

5Source: FactSet, as of 6/2/2023. MSCI EMU return with net dividends and Brent crude oil per barrel (in dollars), 5/1/2022 – 8/3/2022. “Is the EU Ready for Life Without Russian Diesel?” Ashutosh Pandey, Deutsche Welle, 3/2/2023.

6Source: FactSet, as of 6/2/2023. Dutch TTF, 26/8/2022.

7“Europe May See Forced De-Industrialization as Result of Energy Crisis,” Irina Slav, OilPrice.com, 3/11/2022.

8Source: FactSet, as of 6/2/2023. MSCI EMU return with net dividends, 5/1/2022 – 29/9/2022.

9“CEO Confidence Falls Deeper Into Negative Territory in Q4 2022,” Staff, The Conference Board, 20/10/2022.

10Source: FactSet, as of 6/2/2023. MSCI EMU return with net dividends, 29/9/2022 – 3/2/2023.

11“Europe Has Avoided Energy Collapse. But Is the Crisis Over?” David McHugh, Associated Press, 10/1/2023.

12“Is the EU Ready for Life Without Russian Diesel?” Ashutosh Pandey, Deutsche Welle, 3/2/2023.

13Source: European Commission, as of 6/2/2023. Share of gas delivered to the EU by Russia and other countries, January 2019 – November 2022. “How Much of Europe’s Gas Storage Is Full?” Staff, Reuters, 31/12/2022.

14Source: FactSet, as of 6/2/2023. Statement based on eurozone GDP estimate history.

15Source: FactSet, as of 6/2/2023. Eurozone GDP, Q4 2022.

16Source: FactSet, as of 6/2/2023. Eurozone manufacturing, November 2022.

17Source: FactSet, as of 6/2/2023. Dutch TTF, 6/2/2023. “Whisper It, but Europe Is Winning the Energy War With Putin,” Charlie Cooper, Politico, 13/1/2023.


Advertising feature produced by Fisher Investments Canada. The Globe’s editorial department was not involved.

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