U.S. exposure seen as boon for European firms

LONDON (Reuters) - The tide may be about to turn for investors who have shunned European companies with exposure to a U.S. market roiled by the credit crisis.

A preference over the past year for European firms with domestically-focused operations or a strong emerging market presence is under review as growth in Europe starts to decelerate and Asia feels the pain of inflation driven by higher commodity prices.

"The outlook on U.S. growth is weak, but it is not likely to deteriorate more, and relative to Europe, the U.S. is going to look a bit more resilient," said Mislav Matejka, European equity strategist at JPMorgan.

"U.S. (dollar) sensitive names should do a little bit better given that the dollar is not likely to weaken more and relative to the U.S., European weakness is going to become more significant," he said, adding that he favored Dutch financial services group ING (ING.AS) and Dutch insurer Aegon (AEGN.AS).

As Europe follows the path already traveled by the United States, the dollar is likely to recover from its weakness against the euro, which will aid European companies that make a large percentage of revenue there, analysts said.

The dollar lost 8 percent against the euro in the first half of this year, but has gained 0.9 percent in July.

According to JPMorgan, InterContinental Hotels (IHG.L), GlaxoSmithKline (GSK.L), Daimler (DAIGn.DE), Ahold (AHLN.AS) and Wolters Kluwer (WLSNc.AS) are among those European firms that have at least 40 percent of their revenues coming from the United States.

Germany corporate sentiment in July suffered its biggest fall since the 2001 attacks on the World Trade Center, dragged down by the strong euro, high oil prices and tougher borrowing conditions in the euro zone, according to the monthly Ifo index.

The RBS/Markit Eurozone Purchasing Manufacturing Index for companies fell to a five-year low of 48.3 in July from 49.1 in June, while economists had predicted the index at 48.8.

On the other side of the Atlantic, however, U.S. consumer confidence halted a six-month slide in July.

Nick Nelson, UBS's head of equity strategy, said companies that have large U.S. exposure may come into vogue in the next six to nine months.

"Certainly on a six-month view particularly for Europe, the amount of disappointments to come for Europe relative to the expectations of where company earnings are significantly higher than the disappointments to come from the U.S," he said.

"With the U.S., we have a lot of downgrades already."

A quarterly Reuters economic poll in July showed analysts expected the U.S. economy to expand 1.8 percent in 2009, up from a median forecast of 1.3 percent growth this year.

The euro zone, on the other hand, is expected to moderate to 1.2 percent growth next year from an estimate of 1.6 percent this year, while the UK is expected to slow to 1 percent next year from 1.5 percent in 2008.

U.S. STABILISING

"As we go into the first half of next year, U.S. demand will be stabilizing particularly relative to Europe," said Philip Lawlor, chief portfolio strategist at Nomura.

"I think it could well be the story for the first half of next year," he said, but added that the market had to get through the financial storm stemming from a meltdown in risky U.S. subprime mortgage market.

However, Neil Dwane, chief investment officer in Europe for RCM, said that Europe had several factors going for it.

"It's fair to say that more of the America is feeling the pain than most of Europe," he said.

"I also feel that there is an ongoing level of restructuring in Europe, which is not possible in America because they have already fired everybody that they can fire. The Europeans have still got more restructuring potential to benefit from."

Robert Parker, vice chairman of asset management at Credit Suisse, said the biggest demand would still be in emerging markets.

"European companies in 2009 will see better demand in the States than they see in Europe but the biggest demand is still in the emerging market," he said.

UBS's Nelson, however, said skyrocketing commodity prices had put a strain on Asia, one of the fastest growing regions in emerging markets. India's central bank on Tuesday jolted financial markets, raising its benchmark rate by 50 basis points to its highest in seven years and hiking the cash reserve ratio to quell double-digit inflation.

"If you look at it in the sense of the cycle going from west to east, you want to start from the beginning for the recovery," he said.

(Editing by David Cowell)