John W. Krey
John W. Krey, senior investment officer and analyst covering European and other foreign stocks at S&P Capital IQ, which provides investment research to more than 4,000 financial service clients, New York City. CapitalIQ.com
This is an extended version of an article that originally appeared in Bottom Line/Personal. To go directly to the additional content, click here.
The economic outlook for Europe is not pretty. But the outlook for investors could be quite good—maybe even better than in the US—if you know which European countries and companies to focus on.
Weighing against Europe right now: Threats of deflation and recession…mounting tit-for-tat economic sanctions with Russia over Ukraine…and double-digit unemployment in various countries. But that doesn’t mean that the continent is lacking in great stock opportunities. You just have to think of Europe as 50 separate countries rather than one giant bloc that moves in a single direction.
Bottom Line/Personal asked international investment analyst John W. Krey of S&P Capital IQ to sort out the good, the bad and the ugly among European nations and the stocks that should do best, based on assessments and rankings by that research firm’s analysts.
The following nations should continue to see economic growth even if much of Europe stagnates or falls into recession…
Germany’s economy should grow at a 2% rate this year and next. Reasons: It will achieve a balanced budget by next year thanks in part to spending cuts and tax increases. German exports, third in the world behind China and the US, remain strong, especially for autos and electronic equipment and especially to fast-growing parts of Asia. Stocks highly ranked by S&P Capital IQ: Financial-services firm Allianz SE (AZSEY)…Beiersdorf AG (BDRFY), which makes body-care products…electronics manufacturer Siemens (SIEGY).
Hungary has had a strong comeback from its 2012 recession, based in part on surging export growth in manufacturing, drugs and other pharmaceutical products. The economy should expand by 2.5% this year and nearly as much next year. Highly ranked: Specialty pharmaceutical firm Chemical Works of Gedeon Richter (GEDSF)…OTP Bank (OTPGF).
Poland has the fastest-growing economy, powered by its manufacturing sector and rising domestic demand. The economy should grow by 3.3% in 2014 and nearly 4% next year. Highly ranked: Electric utility Enea (ENEAY)…real estate developer Globe Trade Centre (GBCEY).
United Kingdom is my favorite part of Europe, especially now that it has put the potentially damaging prospect of Scotland’s secession behind it. The UK economy continues to benefit from low inflation, shrinking unemployment and tepid but steady growth. Highly ranked: HSBC Holdings (HSBC), the UK’s largest bank…medical device maker Smith & Nephew (SNN)…grocery store giant Tesco (TSCDY). Attractive exchange-traded fund (ETF): Deutsche X-trackers MSCI UK Hedged Equity (DBUK), which tracks more than 100 UK stocks.
Whether the economies of these countries can perform well is questionable, but they have some attractive stocks…
Denmark’s robust industries include shipping, alcoholic beverages, toys (Lego, which is private, is the world’s leading toy company) and wind energy, but its economic growth has lagged, and housing prices are slumping. Highly ranked: Beer maker Carlsberg (CABGY)…alternative-energy provider Vestas Wind Systems (VWDRY).
Ireland‘s economy, powered by the health-care and consumer discretionary sectors, likely will grow by 2.5% for 2014 and 3.3% in 2015. But Ireland faces 11.2% unemployment, a badly damaged banking system and major businesses with some of the heaviest debt loads in Europe. Highly ranked: Beer and cider maker C&C Group (CCGGY).
Norway, which is Scandinavia’s richest nation and has just 3.4% unemployment, can expect moderate growth of 2% this year and next. But it could be hit hard by Russia’s ban on imported seafood from Western countries. Russia is the third-biggest importer of Norwegian salmon in the world. Highly ranked: Telenor (TELNY), the leading telecommunications company.
Sweden rebounded quickly from the 2008-2009 recession thanks to low debt levels, tough fiscal discipline and strong exports of telecommunication equipment and vehicle parts. Growth should be 2.7% this year and 3.3% in 2015. However, Sweden’s recent shift toward left-leaning politics could lead to less business-friendly policies. Highly ranked: Nordea Bank (NRDEF)…Svenska Cellulosa (SVCBY), which makes personal-care products.
Switzerland boasts a mere 3% unemployment, and the economy could grow 2% this year and next. However, with a tiny domestic market, the Swiss are heavily dependent on trade, and there is weakening foreign demand for major Swiss exports such as chemicals and watches. Highly ranked: Automation-technology provider ABB Ltd. (ABB).
The following countries are also borderline, and they currently have no stocks that are highly ranked by S&P Capital IQ. However, attractive stock opportunities could emerge in these nations if European economies improve substantially.
Austria boasts one of the lowest unemployment rates in Europe (7.6%), with a strong service sector driven by law firms, banks and tourist attractions. However, the economy, which is expected to grow just 1.5% this year and 1.9% in 2015, still depends heavily on European trading partners and won’t improve until the rest of Europe does.
Belgium follows much the same pattern as Austria, with a growth rate likely to be 1.3% in 2014 and 1.6% in 2015. Moreover, the loss of more than half of the country’s nuclear power capacity in safety-related shutdowns this year is taking a toll.
Czech Republic has been one of the better-performing countries in central Europe, with estimated growth rates of 2.2% in 2014 and 2.6% in 2015. But the lack of a strong domestic economy makes it dependent on weakening trading partners in Europe.
Finland is powered by forestry products and electronics exports. But it is among the European countries most affected by the Russia-Ukraine crisis. Russia has threatened to slow or cut off energy exports to Europe, and Finland depends on Russia for 100% of its natural gas needs. Economic growth will likely be flat in 2014 and 1.3% in 2015.
Iceland has an impressive rebound underway with 3.1% economic growth likely this year and next. However, the process of removing strict bank and government controls that were imposed to support the Icelandic currency during the country’s financial crisis may unnerve investors and hurt Iceland’s recovery.
Romania. Although GDP growth will likely be above 2% in both 2014 and 2015, the government is one of the most corrupt in Europe, with 28 members of the parliament currently on trial or already serving jail time for bribery and/or conflict of interest.
Slovakia was one of Europe’s fastest-growing economies prior to its financial crisis, with booming auto and industrial machinery sectors. Although the economy will likely grow 2.4% in 2014 and 2.8% next year, the country is wrestling with 12.6% unemployment and a heavy reliance on Russian oil for its energy needs.
Slovenia ‘s economyrelies mainly on exports that it sends to slumping European neighbors. It has slipped in and out of recession since 2009 and is expected to grow just 0.5% this year and 1.3% in 2015.
Turkey ‘s economy should grow a brisk 3.2% this year and 3.5% in 2015. But investors are troubled by increasing government authoritarianism, including attempts to block websites and to track individual online users without court review.
Stocks overall will have a hard time thriving amid stagnant economies in these nations, which are in danger of falling back into recession this year or next if they are not already in recession. Although there are some stocks in these countries that will do well, such as Heineken Holding in the Netherlands, they will benefit from global strength, not from the local economies.
France has produced zero growth or contraction in six of the past nine quarters since President François Hollande instituted his unsuccessful program to stimulate the economy.
The Netherlands is plagued by some of the heaviest home owner mortgage debt in Europe. Austerity measures such as higher taxes have sapped consumer spending. The country was recently stripped of its coveted triple-A credit rating.
Greece’s economy has stabilized since its near-collapse threatened the existence of the euro. But drastic budget cuts have pushed unemployment to 27%.
Italy has eked out only one-quarter of economic growth in the past three years and is saddled with 12.6% unemployment.
Portugal still suffers from a banking crisis. One of the country’s largest banks recently needed nearly $7 billion for a bailout.
Spain has quelled the fears that it would default on its government debt by enacting budget cuts and structural reforms. However, 24.5% unemployment continues to stall economic growth.
The remaining countries in Europe aren’t worth consideration by investors based on one or more of the following factors—they are too politically unstable or suffer from pervasive corruption and government control…their economies offer little or no upside in the foreseeable future …the stocks of their publicly traded companies, if they have any, are illiquid and very difficult to research, buy or sell. These countries include Albania, Armenia, Azerbaijan, Belarus, Bosnia & Herzegovina, Bulgaria, Croatia, Cyprus, Estonia, Georgia, Kosovo, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco, Montenegro, San Marino, Serbia and Ukraine.
