LONDON European companies with big sales in the United States are already suffering from the threat of a protracted political standoff over the U.S. budget, with analysts cutting earnings forecasts and shares underperforming.
Data compiled by Reuters on Friday shows that a basket of shares of firms in the STOXX 600 Europe index which make at least half their sales to North America had lost 2.7 percent in 14 days. Those with most of their sales in Europe have slipped 1.0 percent. The index overall fell 1.7 percent.
The partial U.S. government shutdown and wrangling over the federal debt is driving investor money from the United States to Europe. But some European companies, notably in pharmaceuticals, capital goods and the construction sector, face pain rather than gain from the Washington standoff.
These include British-listed defense groups BAE Systems (BAES.L) and Cobham (COB.L), drugs firm BTG (BTG.L) and German construction company Heidelbergcement (HEIG.DE), which rely on U.S. government contracts for between 20 and 40 percent of their revenues, according to Credit Suisse estimates.
U.S. exposure has helped some European companies outperform local peers as Europe's own economic growth has lagged. Analysts now see a reversal in the cheaper valuations for Europe-focused firms, which now stand to gain as the growth outlook for Europe improves and Washington generates uncertainty for business.
U.S.-focused companies in the STOXX 600 Europe saw analysts cut 2013 earnings forecasts by an average of 2.9 percent in the past 30 days, while forecasts for the index as a whole stayed flat, data from Thomson Reuters Worldscope and StarMine shows.
BAE sells military hardware and other products and services to the U.S. government, accounting for 40 percent of its revenues last year, according to Credit Suisse.
It has warned that the shutdown will have a significant and immediate impact on government contracts that depend on short-term funding. In the past week, BAE shares have dropped 3.3 percent, against a 0.9 percent fall on the FTSE 100 .FTSE.
"Companies that sell to the U.S. government are going to be more directly affected, but even companies that sell to the U.S. generally," Dan McCormack, a strategist at Macquarie, said.
"There is a risk of a slowdown of economic activity at least for a couple of months, given the shock to confidence that this is going to entail, so all those guys should be getting hurt."
EARNINGS FORECASTS CUT
Of those companies in the STOXX 600 Europe index that make at least 50 percent of their sales in North America, those hardest hit by cuts in analysts' earnings forecasts were building material provider CRH (CRH.L) (CRH.I) and car maker Daimler (DAIGn.DE). Their profit expectations were cut by 4.2 and 5.9 percent, respectively, StarMine data showed.
CRH, whose shares have dropped 2.7 percent in the past week, has a major U.S. business in providing materials for infrastructure projects - it is the biggest producer of asphalt, for example - and so is exposed to the public sector. Daimler is less directly affected by government spending, although it does sell trucks to federal agencies as well as school buses.
"Historical analysis suggests if the shutdown lasts longer than 10 days it begins to negatively impact equity markets," said James Butterfill, global equity strategist at Coutts.
"It also tends to hit corporate confidence, leading to delays in capital expenditure plans."
A selloff in European companies with U.S. exposure may also be exacerbated by profit-taking as these stocks have outpaced the broader index and Europe-focused firms since the start of the year - a trend that a European recovery has been reversing.
European companies which earn at least half of their revenues in the United States trade, on average, on 15.3 times their expected earnings for this year, against 14.2 times for the STOXX 600 as a whole.
Other European firms, could go on outperforming their U.S. peers, as they did in the four weeks before and after the previous debt ceiling deadline at the end of 2012.
"In an environment of flattish to slightly up U.S. markets, Europe can outperform because there are significantly cheaper valuations and the growth dynamics are more supportive as well," Emmanuel Cau, a strategist at JP Morgan, said.
(Graphics by Francesco Canepa; Editing by Nigel Stephenson and Alastair Macdonald)