Tuesday, April 7, 2015

The European Stocks QE Has Yet to Lift

On November 17, gas prices had dropped to $1.9...
On November 17, gas prices had dropped to $1.99 in Bakersfield, California, due to falling Oil prices (Photo credit: Wikipedia)
A rising tide lifts all boats, or so they say. The European Central Bank’s $1.1 trillion asset buying program, an export-friendly slump in the value of the euro and falling oil prices have sent European stock prices surging this year.

Investors have bet successfully on cyclical and defensive stocks with international exposure. Indexes have soared higher. The Stoxx Europe 600 index of leading European shares is up 18%. The FTSE 100 is up 4.1%, the Cac 40 up 19.2% and the Dax up 22%.

But that doesn't mean everything is keeping pace. Here are the sectors for which events elsewhere are proving a drag on performance, leaving big-cap stocks in the shadow of their indexes.

Commodities

London-listed Anglo American is Europe’s worst-performing blue chip stock this year, down 17% though bigger rivals Rio Tinto and Glencore are also in negative territory. As producers of commodities like iron ore and coal, whose prices have fallen sharply, the miners’ fortunes are closely linked with slowing growth in China. What might change? Anglo American puts its faith in platinum, of which it is the world’s biggest producer, counting on better demand and prices from “increased demand for new cars across Europe… given its use in catalytic converters,” says spokesman James Wyatt Tilby. For the sector as whole, watch China, says Dennis Jose, equities strategist at Barclays. Recent signs of more determined economic stimulus from Beijing might bolster industrial activity and demand for raw materials.

Steel

Shares in ArcelorMittal, the world’s biggest steel maker by shipments, are down 5% so far this year. The group is also a major iron-ore producer in its own right so has suffered from falling prices. Growing Russian and Chinese exports have contributed to weak steel prices on export markets. “While ArcelorMittal hopes to overcome these challenges via cost cutting and increased focus on high-margin steel products sold into the automotive sector, which should benefit from a weaker euro, the company faces a steep uphill battle over the coming year,” says Jefferies analyst Seth Rosenfeld. ArcelorMittal declined to comment.

Power

Europe’s power utilities have long been caught in a perfect storm of slow growth, rising taxes, and weak wholesale prices. The sector is still adjusting, hence investor neglect that has left the likes of Centrica in the U.K., RWE of Germany, and EDF of France among the year’s worst laggards. A rebound may hinge on investors seeking out value in the once-defensive sector which is benefiting from record-low funding costs, assuming investor interest in export stocks fades and Europe’s economic recovery takes hold, says Rob Griffiths, global equity analyst at Credit Suisse.

Crops and Clothes

Among the biggest decliners in Europe this year is Associated British Foods, down nearly 10%. The family-controlled company is an unusual hybrid. As a big producer of sugar and fodder, the group has suffered from the global malaise of weak raw-material prices, stretching from crude oil to copper. But ABF also owns Primark, the rapidly growing European fast-fashion retailer, which competes with the likes of H&M and Inditex’s Zara. Improving consumer confidence in Europe and more stable commodity prices might yet prove a powerful mix at ABF. “It is hard to see a better structural growth story in the [staples] sector,” say analysts at Credit Suisse. ABF declined to comment.

- Alex MacDonald contributed to this post.





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