"Buy hope; don't wait for reality."
Probably the only thing in the article worth reading <g>
interactive.wsj.com
The Global Player
European Investors Should Heed Sinking U.S. Economy
By MICHAEL R. SESIT Staff Reporter of THE WALL STREET JOURNAL
LONDON -- "Zip-a-dee-do-dah, Zip-a-dee-ay ... as the U.S. economy sinks, I've got nothing to worry about today."
Not quite the exact words from Walt Disney's 1946 film "Song of the South," but also not a bad portrayal of the unworried -- almost smug -- attitude many investors are taking toward Europe's economy and financial markets as the U.S. economy sinks deeper, and deeper and deeper.
"There's a lot of complacency around, about both the U.S. and Europe," says Robert Kerr, a European equity strategist at Bank of America. "People forget there's negative economic momentum in Europe; it's just not as steep as the U.S."
No doubt, Uncle Sam is in the stew. Alan Greenspan has said so; U.S. consumers say so; U.S. economic data say so; U.S. business surveys say so. Shucks, the Purchasing Management Association of Chicago's index of area business activity in January plummeted to an 18-year low.
Despite this evidence, many analysts are still peddling the idea that Europe is immune, "We don't need the U.S." Well, toots, maybe it's time to look at what happens if they're wrong. Maybe, just maybe, that old saw "When the U.S. sneezes, Europe catches a cold" still has some validity.
After all, the Ifo index of German business sentiment has fallen for seven months in a row. French business confidence is at a 14-month low, Italian at its lowest in 13 months. "Tax cuts and a relatively robust outlook for the domestic economy may be insufficient to offset the impact of declining world activity on business confidence in the euro-zone during the months ahead," warns Moody's.
Adds Carl Weinberg, chief economist at consultants High Frequency Economics: "All indications suggest Euroland's three biggest economies -- Germany, France and Italy -- are headed for a sharp slowdown in growth in 2001."
What's more, some people wonder whether the European Central Bank is in self-denial. "The ECB are a bit complacent; they still have a very optimistic growth forecast of about 3% for the euro-zone," says Leo Doyle, a European economist at Dresdner Kleinwort Wasserstein. "Although they are aware that the economy might slow, I don't think they're aware of how rapidly that might translate into uncomfortably low inflation, particularly if the oil price falls and the euro strengthens."
"The combination of a stronger euro, falling prices and slowing growth; and in a year's time, you could be looking at outright price deflation which is certainly no good for profits," says Mr. Doyle. "Even a soft landing in Europe is no good for profits." His firm's base-case scenario has Euroland chugging along this year at 2.5%. But take a "small" recession across the Atlantic, and that sinks to 1.8% -- assuming the ECB cuts interest rates, which it has yet to do.
"People look at the recent rate cuts in the U.S. and say, 'Boy, that economy must be in deep do-do,'" says High Frequency's Mr. Weinberg. "I say, 'Look at Euroland with no rate cuts; that economy must be in deep do-do.'"
In a recent piece of research, Michael Hartnett, head pan-European equity strategist at Merrill Lynch & Co., rhetorically asks why the euro isn't stronger, "if the European outlook is so benign?" One reason might be that fund managers, buying the Euroland uber alles story, have already loaded up on the common currency. "A more worrying interpretation is that currency markets are questioning the ability of European growth and earnings to outperform the U.S. on a sustained basis," writes Mr. Hartnett.
Moreover, America is only part of Europe's problem. Japan, Korea, Malaysia, Thailand, Singapore and Indonesia aren't in great shape -- and they account for 15% of world trade.
All right, you get the picture. So what do you do about a U.S. recession? "For companies that manufacture in Europe and sell in the U.S., it's a big problem. If the U.S. is in a recession, I don't see a great market for Porsches," or other luxury goods makers, says Mr. Kerr of Bank of America. "Least affected will be European companies selling to European customers in Europe; the closer you get to the European consumer, the better it gets."
He recommends food retailers, such as J. Sainsbury, Tesco and Casino Guichard Perrachon. Other places to hide are construction -- Mr. Kerr likes Dragados -- and specialty chemical companies such as Beiersdorf and Henkel. When it comes to cars, he says that Peugeot should be less affected than BMW and Volkswagen.
J. Paul Horne at Schroder Salomon Smith Barney urges sticking with "solid, liquid, blue-ribbon equities" which in Europe include banks, asset management, health care and, yes, some telecoms. He labels banks a restructuring story, health care a defensive play and telecoms a buy-'em-cheap opportunity.
His firm's model portfolio includes ING Groep, SE-Banken, Societe Generale, UBS, Cable & Wireless, Siemens, Nycomed Amersham and AstraZeneca. "The same choices would apply in a U.S. recession scenario," says Mr. Horne. "They are basically conservative to begin with, value stories or restructuring plays. And there's the added dividend that if things get softer, interest rates will go down further."
Still, be wary of the fallout from a U.S. recession. As they say in zip-a-dee-do-dah land, Europe could get hit real hard upside the head.
Or you can take the advice gurus at Societe Generale recently offered: "Buy hope; don't wait for reality." |
