Il Sole 24 Ore Plus

Il Sole 24 Ore Plus

For European banks and media, the forecast for the year is upwards.

European shares better placed than US ones to benefit from the recovery

Laura Magna

Everyone’s mad about Europe, while Wall Street goes into reverse. Even though the European recovery is still feeble and the numbers are looking healthier on the other side of the Pond. 2015 will be Europe’s year, thanks to factors such as the fall in the oil price and the weak euro, and expansionary fiscal and monetary policies. “Since the start of the year we’ve seen an increase in flows in Europe”, Luca Riboldi, Banor Sim’s chief investment officer, tells Plus24. “And since October, the Citigroup
Economic Surprise Index for the euro area, the index that measures surprises on the macro data, has seen Europe’s numbers exceeding expectations while previously they were falling”.

At the same time, for the US the money managers are starting to rest on their oars. Anima Sgr talks of a “non-constructive” position. “It might seem surprising if we look at the strength of the American economy”, says Armando Carcaterra, investment director at Anima, “but the economy is one thing, the stock market another”.

This divergence emerges if we consider the impact of the appreciation of the dollar and the fall in the oil price. Cheaper crude oil is a good thing for an economy largely dominated by consumption, which in the US accounts for two thirds of GDP. But it doesn’t benefit a stock market that’s overexposed to industry and in which energy companies invest one third of the total”.

The stronger dollar isn’t too harmful for a closed domestic economy, with, continues Carcaterra, “exports and imports worth just 30% of GDP, but it penalises a Wall Street that’s ‘stuffed’ with multinationals. In the coming quarters American businesses will have to bear rising labour costs, a probable monetary squeeze, the impact of the strong dollar on revenue
outside the US and falling energy investment, which will reduce margins and profits”.

Projections have already been revised markedly downwards. Aldo Martinale, research and analysis officer at Banca lntermobiliare, points out that “the consensus on the S&P 500 sees a fall in profits in the first two quarters of 2.2% and 1.2%, while for 2015 as a whole growth has been revised down 3%. Multiples are expanding, with P/E above 17X, a value that’s even less sustainable with rates rising from the third quarter onwards, albeit very gradually”. European firms, on the other hand, “still have room for a recovery in earnings, while the profitability of US companies has for months been at record levels”, continues Martinale.

Which sectors and stocks should a European portfolio focus on? “To date, companies whose profits are in dollars have earned a lot”, concludes Riboldi. “But in the long term there’s an under-valuation with respect to the historic average. Even the sectors most dependent on domestic demand will soon be picking up. The rate of poor performance will be
notably reduced. We’re feeling positive about banks and media, where we expect to see a recovery in advertising investment”.

Original article in Italian language, available here: Il Sole 24 Ore Plus, February 28, 2015.


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