LONDON Aug 6 Times are getting tough for
European firms in emerging markets where HSBC talks of
a cyclical "slowdown", Diageo sees "choppy conditions"
and Unilever views deceleration as the "new normal".
One way or another, the slowing growth story in countries
like China, Brazil and India is turning out to be the Achilles
heel of Europe's big corporations this reporting season - from
banking to whisky to food and pharmaceuticals.
Faced with recession-hit demand at home, companies have been
expanding heavily in emerging markets, which are expected to
account for 33 percent of sales this year, or 2.8 times more
than in 1997, according to a Morgan Stanley analysis of 505
leading European groups.
That has attracted investors on the way up - but it now
makes businesses vulnerable as the boom loses momentum. It is
also exposing particular mis-steps in some crucial countries.
So far this year, shares in European companies with high
emerging markets exposure have increased by just under 5
percent, lagging gains of more than 11 percent in the broader
"Investors are less and less viewing emerging markets as a
safe haven. Instead, they are looking at putting more money back
into Europe," said Stephane Ekolo, chief European strategist at
Adding to the pain is a weakening of a number of emerging
market currencies, such as the Brazilian real and India rupee,
which Unilever CEO Paul Polman said had been "bigger and deeper
than anybody has anticipated" - a fact that threatens Western
companies' pricing power overseas.
On top of pressure on sales and margins, the current
slowdown can also reveal other weaknesses.
HSBC's bad debts in Brazil and Mexico, for example, have
jumped, adding to the more general gloom that sent shares in
Europe's biggest bank down more than 4 percent on Monday, while
rival Standard Chartered hit problems in South Korea.
Brazil has been a black spot, too, for drugmaker Sanofi
as slowing sales exposed over-stocked supply lines - a
situation CEO Chris Viehbacher described as "a mess".
UNWINDING STRETCHED VALUATIONS
China is the real worry for many companies, however. With an
expected 2013 growth rate of more than 7 percent, it may sound
like an economy still humming, but the decline from the
double-digit rates seen in earlier years is a shock.
Germany's Lanxess, the world's largest maker of
synthetic rubber for tyres, felt the China chill on Tuesday as
it warned that slowing growth and no sign of a recovery in car
markets would hit earnings.
Such warnings - coupled with a survey showing business
activity across emerging economies contracted for the first time
in over four years last month - help explain eroding premiums
for companies with emerging markets exposure.
"We're seeing an unwinding of what were some pretty
stretched valuation premiums, especially now we've started to
see positive signs on the European economy," said Andrew King,
head of European equities at BNP Paribas Investment Partners.
Structural changes are also redrawing some market
opportunities, particularly in China, where there is a shift to
less reliance on exports and investment as drivers of growth.
"There will be stresses and strains as China makes that
shift and that's evident," said Standard Chartered CEO Peter
Sands, who sees plenty of variation across emerging markets.
A change of leadership in Beijing has also brought with it a
crackdown in the tradition of gifts-for-favours, hitting makers
of luxury watches and handbags, such as Gucci owner Kering
and LVMH, as well as producers of deluxe
drinks brands, including Diageo and Remy Cointreau.
Drug companies face probes into over-pricing and alleged
bribery in the industry, centred on GlaxoSmithKline,
threatening short-term turmoil in a pivotal growth market.
Top Western milk formula makers, including Nestle
and Danone, have already been pressured to cut prices
in China - and foreign luxury carmakers could be next, according
the country's official media.
While growth in the big emerging markets saved corporate
profits during the depth of the downturn, it is clear things
will look different from now on - though that does not mean the
emerging markets story will flip from boom to bust.
HSBC CEO Stuart Gulliver points out that China's economy is
still growing more each year than its original GDP 18 years ago.
And the weather remains kind to Unilever. The consumer group
now sells 40 percent of all its ice cream in emerging markets,
where at least the sun shines for more of the year.
(Additional reporting by Steve Slater, Astrid Wendlandt and
Kate Holton; editing by Janet McBride)