Big European groups expect boost from weak euro
LONDON, ENGLAND - NOVEMBER 26: In this photo illustration Euro notes are displayed in a pyramid, on November 26, 2010 in London, England. Concerns over the Euro zone debts have caused shares to retreat today by 1.3 percent, as speculation continues over other countries seeking financial help. According to reports, a 85 billion euro (112.7 billion USD) rescue package from the EU and International Monetary Fund (IMF) will be announced for Ireland on Sunday. (Photo illustration by Dan Kitwood/Getty Images)©Getty
The biggest European companies are expected to report a boost from the weak euro as third-quarter results season kicks off.
Nearly half of all revenues made by large European listed companies – some 47 per cent – come from outside the region. For many of Europe’s multinationals, who make much of their sales in US dollars, the single currency’s fall of about 8.5 per cent against the dollar since early May will help offset tepid growth in the eurozone itself.
“A weaker euro boosts economic growth, staves off deflation fears and supports corporate profits,” said Nick Nelson, a strategist at UBS in London.
When the regional economy began to pick up from the worst of the crisis, companies faced a headwind from a strong euro. Now, the weaker euro was “central to the whole investment case”, he said.
“Euro strength didn’t make sense,” said the head of one large Spanish construction company, which makes the bulk of its earnings in North America and the UK.
Any good news in this quarter’s earnings seasons would be welcomed by investors, given weak macroeconomic data across most of the region and signs that even the eurozone’s largest economy, Germany, may be sliding into recession.
Analysts have so far downgraded their earnings forecasts for European equities for 42 months in a row, only nine months less than Japan in the early 1990s.
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The euro has depreciated by about 5 per cent on a trade-weighted basis since early May, when the European Central Bank first signalled its intention to adopt negative deposit rates, and many analysts forecast a more sustained decline. Barclays expects the currency to drop to $1.10 against the dollar by the end of the year, while Deutsche Bank forecasts it could fall below parity with the greenback by 2017.
Dennis Jose, a strategist at Barclays, said a 1 per cent year-on-year decline in the euro dollar rate had been consistent in the past with a 0.5 per cent increase in sales growth and a 1.2 per cent increase in average corporate earnings growth.
Given long-term contracts and currency hedges, it will take time for the change in the exchange rate to be fully reflected in profits, but the effects will start to appear from the third quarter onwards.
Given the euro’s fall has been sharpest against the dollar, companies with significant US or dollar-denominated sales such as Airbus or BASF would eventually be among the biggest beneficiaries – while low-cost airlines that buy fuel in dollars but have no dollar revenues could be among the worst affected.