Some European companies including Anheuser-Busch InBev, which owns Budweiser beer, generate more of its sales outside of Europe.
Drew Angerer/Getty Images
Europe is facing a world of hurt as the region is engulfed by energy crisis in the wake of the war in Ukraine, leaving households and businesses navigating shortages and surging costs that threaten Europe’s economic growth prospects.
European stocks are down 33% so far this year, worse than the 23% loss suffered by the S&P 500. Europe has taken the brunt of the hit from sanctions against Russia for its invasion of Ukraine. The situation worsened in recent days as Russia indefinitely turned off the gas spigot to Europe’s main pipeline, sending policy makers scrambling for ways to mitigate the impact.
The European Central Bank on Thursday raised interest rates by 0.75% and projected economic growth of just 0.9% next year from 3.1% in 2022. In a note to clients,
Nordea
strategist Sebastian Galy described the central bank’s growth forecasts as overly optimistic given the questions about oil and gas supply. “The problem isn’t yet a wage inflation spiral but it is a rising risk compounded by a weak euro and excessive global demand,” writes Galy, who sees the prospects of a volatile period ahead for the euro.
The equity market though has already largely discounted a recession in the next 12 months, offering opportunities for patient bargain hunters, according to a client note from
Morgan Stanley Wealth Management
Chief Investment Officer Lisa Shalett.
Source: Bloomberg
One place to look may be companies domiciled in Europe that get more of their sales from outside the region, including the U.S., which looks to be in better economic shape. Whereas a strong dollar crimps the growth prospects for U.S. companies with a large share of foreign sales, the weak euro offers a glimmer of good news for European companies that generate a good chunk of sales abroad.
Barron’s screened for large companies listed in Western Europe, focusing on those that generate at least two-thirds of their sales outside of Europe, trade below their five-year historical price-earnings ratio and are expected to generate earnings growth over the next year despite the challenging economic backdrop. We turned up 10 companies worth a closer look as European assets are battered by economic worries. The list includes industrial
Schneider Electric
(SU. France), which is well-positioned for the transformation to the power grid, and real estate firm
Compass Group
(CPG.United Kingdom). Also on the list: consumer staples like
Unilever
(ULVR.United Kingdom),
Nestl?
(NESTLE.Switzerland) and drugmakers like
Novartis
(NOVN.Switzerland),
Roche Holding
(ROG.Switzerland) and
GSK
(
GSK
.
United Kingdom). Both are sectors favored by strategists looking for a place to ride out the volatility.Drugmakers are also slimming down their operations. As Barron’s reported last month,
Novartis
recently spun-off its generics unit, a move that could ease some of the troubles for
Novartis
‘ stock. The U.K.’s GSK raised its full-year outlook this summer when it released its first set of results as a more focused biopharma company, following the spinoff of its consumer health unit
The screen also turned up luxury makers like
Christian Dior
and
LVMH Mo?t Hennessy Louis Vuitton
(LVMH.France). While LVMH, for example, has a strong presence in China, which is struggling with an economic slowdown and Zero-Covid restrictions denting consumer confidence, luxury retailers have been relatively resilient. Whereas an economic slump and the sting of inflation can severely dent the budgets of households on the lower-end of the income bracket, LVMH’s customers may be more insulated–limiting the hit.
Also well-represented on the screen: Consumer staples, including
Anheuser-Busch InBev
(BUD) generates more than 85% of its sales outside of Europe. The company’s earnings consistency has begun to improve after a period of volatility and stands to benefit from ongoing strength in its Latin American markets, home to consumers that have had a long history of dealing with the type of unfamiliar inflation Europe is grappling with now.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
