LONDON/FRANKFURT Nov 2 From advertising and
luxury goods to cars and heavy engineering, European industry is
retrenching and abandoning its already modest growth targets, a
worrying sign for investors who bought into the summer stock
The signals from third quarter results so far are that
Asian, emerging market and resources sector demand is no longer
making up for weakness at home.
The car industry has turned in a story of tumbling profits,
plant closures and the first industry bailout since the 2008
crisis for Peugeot. Advertisers are seeing budgets
cut, machine tools makers ABB and Sandvik
have lost much of the previously buoyant demand for mining
equipment and oil rigs.
Top German grocer Metro turned in a 35 percent
plunge in profits and warned of worse to come, and even luxury
clothing group Gucci's previously insatiable Chinese
customers are curbing their appetites.
"We're seeing evidence of a weak economy all around us,"
Royal Dutch/Shell's Chief Financial Officer Simon Henry
told reporters on Thursday.
As well as being Europe's largest company selling fuel to
millions of drivers and manufacturers, Shell also provides the
chemicals that go into making everything from detergents to
refrigerators via waterproof clothing and computer parts.
"European consumer and commercial/industrial demand is
pretty weak across the board, including chemicals, and (there
are) very few signs of recovery," Henry said.
Thomson Reuters Starmine data shows that out of the 53
percent of leading European companies outside the energy sector
that have reported earnings so far, 44 percent undershot
forecast profits. More worryingly, as an indicator of future
earnings growth and the robustness of demand, 53 percent missed
expectations for revenue.
Reuters asset allocation polls out this week showed that a
shift into keenly priced European equities continued into
October. Global fund holdings troughed in May.
But portfolio managers are hedging their bets.
"We will see a worsening of the situation that we have had
for the past two years. You have to see where additional returns
can be achieved with acceptable risks," said Hans-Jörg
Frantzmann, Head of Institutional Sales & Relationship at
Fidelity in Germany.
"We recommend fishing in a pond that is as big as possible.
For investors in Germany that means not just focusing on Germany
or the euro zone, but looking worldwide."
LONG TERM RETREAT
Data from funds industry trackers Lipper shows that in both
absolute and relative terms, European investors have been
reducing their holdings of shares in developed markets like
Europe and the United States since 2006.
Developed market equity has been squeezed in the risk
spectrum by emerging market equity and alternatives like
derivatives, commodities and property at the higher end, and by
emerging market and global high-yield bonds at the lower end.
By June of this year, the total pot invested by European
cross-border mutual funds in national and regional developed
markets equity had fallen to 303 billion euros and 15 percent of
the total. That was down from 464 billion euros and 29 percent
of the total invested in 2006.
"I would expect the 'squeeze' of developed market equity
funds to continue, certainly in the near term", said Ed Moisson
Head of Lipper's UK & Cross-Border Research.
"Even if emerging market debt and high yield bonds, which
have enjoyed the biggest inflows over the past twelve months,
lose their appeal, it seems more likely that it will be global
and emerging market equities that will be the main
NO SAFE HAVEN
Analysts at Morgan Stanley spotted the early signs of an
unjustified rally this summer in both European and U.S. shares.
"We think it's now time to turn defensive on what is likely
to be a tradeable setback for risk assets, particularly
developed world equities," the bank's cross asset strategy team
said in a research note last week.
The signals are not all one way. Norway's $660 billion
sovereign wealth fund said on Friday it was optimistic on
European stocks for the long term, even though it bought less of
them in the third quarter compared to earlier this year.
But even those European stocks that might have worn a
defensive tag in Europe look less of a safe haven in this cycle.
Food groups Danone and Nestle have reported
disappointing sales as consumers switch to cheaper alternatives,
and healthcare giant GlaxoSmithKline has been hit by
continued pressure on drug prices in austerity-hit Europe.
Slipping business sentiment in core European countries such
as Germany as well as slowing Asian demand for European cars and
machines seem to indicate the coming months could remain tough.
"Europe is not going to be a growth engine for the world for
the next year," Willem Verhagen, Senior Economist at ING
Investment Management, said.