Europe's status as a significant importer of oil has left the bloc painfully exposed to the largest energy shock on record — but not all of the continent's underlying countries, sectors and companies are affected equally. HSBC analysts on Thursday outlined ways to 'energy-proof' a portfolio of European equities, reflecting their own positioning on the continent. The bank's largest overweight is to the U.K., which its analysts think can act as a "stagflation hedge" while benefiting from potential Middle East de-escalation with a "further relief rally in financials." The strategists prefer France to Germany, upgrading the former to 'overweight' and downgrading the latter to 'neutral'. France stands out for its resilience, HSBC said, as it boasts a more diverse energy mix than regional peers — including strong output from nuclear and renewable sources. European equity funds' positioning in French equities has fallen to its lowest level in almost 8 years, which HSBC uses as a contrarian buy signal. "Lastly, we think that France's key aerospace and defense companies – Safran , Airbus , Thales and Dassault – are mostly large global players with dual civil & defense revenue streams, whereas the German defense sub-sector – [which comprises] 5.7% of FTSE Germany – appears narrower," the analysts added. HSBC is most bullish towards financials, despite the industry's exposure to changes in oil and gas prices. This is because banks' profits are heavily influenced by inflation and consumer spending, both of which could affect interest rates if the conflict is prolonged significantly. In its analysis of the 100 most sensitive stocks to changes in oil and gas prices, financials represent the highest number of names, closely followed by industrials and consumer cyclicals. "Rather than a deterrent to our overweight positioning in financials, this actually suggests there could be more potential for a financials relief rally, if the Middle East conflict continues to de-escalate," the analysts wrote. Danone , Deutsche Bank and easyJet all made the list of stocks HSBC identified as most sensitive to the crisis. HSBC is most bearish on consumer staples. "Although sensitivity to the oil price is moderate, a long period of elevated energy prices could see higher food prices and strained margins," the analysts said. "Increasing transport costs could also adversely impact overseas earnings for the sector."
