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(Bloomberg) — Europe’s energy sector has room to extend its outperformance versus the broader market as investors are only beginning to price in a structural shift in supply risks amid war in the Middle East, according to analysts at Morgan Stanley.
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Analysts led by Martijn Rats upgraded their stance on the sector to attractive from in-line. They said that while oil and gas price shocks stir inflation, tend to push interest rates higher and are a headwind for economic growth and equities in general, they benefit energy stocks.
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That divergence has been visible since the start of war in Iran, with the Stoxx 600 down 8.6% while its energy sector sub-index has advanced 10% since the end of February. Morgan Stanley analysts, while cautioning that the move carries downside risks after the rally, see the macro backdrop continuing to favor the sector over other parts of the market.
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“The recent relative rally still has further to run,” the analysts wrote. “The market is only beginning to price a lasting change in energy security, effective spare capacity and the value of secure supply.”
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Morgan Stanley analysts upgraded BP Plc and Repsol SA to overweight, citing their stronger leverage to a higher-for-longer oil and gas environment and improved scope for shareholder returns as cash flows rise. They turned more cautious on more defensive stocks, with Shell Plc downgraded to equal-weight, reflecting more limited upside in a rising price environment.
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—With assistance from James Cone.
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