Europe Profits Beating U.S. as Bull Market Intact (Update3)

March 15 (Bloomberg) -- Europe is growing at half the U.S. pace, the U.K. budget deficit may reach 12.6 percent of gross domestic product, and that’s proving no deterrent to the strategists who picked last year’s market bottom.

The Stoxx Europe 600 Index of companies in 18 western European countries may rise 30 percent this year, according to Ian Harnett, the Absolute Strategy Research Ltd. analyst who told investors to purchase equities just as the benchmark gauge began a yearlong, 64 percent surge. JPMorgan Chase & Co.’s head of European equity strategy Mislav Matejka says British hoteliers and German shoemakers will rally as European profits climb twice as fast as the Standard & Poor’s 500 Index.

“There is a powerful cocktail pointing at a further advance,” according to Harnett, who said in March 2009 that equities might gain 50 percent. “The economy is unlikely to collapse, earnings numbers still have upside relative to expectations, and finally, valuations aren’t stretched.”

InterContinental Hotels Group Plc, the Windsor, England- based owner of Holiday Inn, and Puma AG in Herzogenaurach, Germany, the country’s second-biggest sporting goods maker, are poised to gain as Americans boost spending, Matejka said. The London-based analyst also recommends industries that benefit most when economies grow, such as retailers, automakers and computer companies. He’s advising investors to sell utilities, pharmaceutical makers and telephone companies.

Bigger Gains

Matejka advised clients on Feb. 3, 2009, to buy companies that move the most relative to benchmark indexes, known to traders as high-beta stocks, and recommended companies tied to economic growth such as industrials and commodity producers. Measures for both groups in the Stoxx 600 gained 96 percent on average from the start of the rally through the end of 2009, according to data compiled by Bloomberg.

Harnett says the Stoxx 600 will advance as much as four times the 7.3 percent average estimate for the S&P 500 by 13 strategists at U.S. securities firms. The European benchmark index dropped 0.7 percent to 256.65 today, while the S&P 500 rose 0.1 percent.

Earnings in Europe will improve 51 percent as the global economy rebounds from the worst financial crisis since the Great Depression, compared with a 25 percent increase for the S&P 500, data from more than 1,500 analysts compiled by Bloomberg show.

The average estimate for 2010 income in the European gauge climbed to 19.87 euros a share from 19.59 euros in January, data compiled by Bloomberg show.

Fewer Firings

Companies in Europe are better prepared for rising demand because they didn’t fire as many workers during the downturn as in the U.S., Harnett says. America’s unemployment rate has more than doubled to 9.7 percent since February 2008, rising three times as fast as Europe’s, data compiled by Bloomberg show.

The euro’s 3.9 percent slump against the dollar may provide a boost by increasing the value of overseas profits. European companies get about 35 percent of revenue from outside the region, according to data from Bank of America Corp. in Charlotte, North Carolina. The U.S. depended on exports for 11 percent of gross domestic product in the fourth quarter, Commerce Department data show.

“European and U.S. companies took very different approaches to the credit crunch,” Absolute Strategy said in a March 4 note. “U.S. corporations shed labor dramatically, while EU companies kept their workforce largely in place and cut production. If the recovery accelerates there is now less scope for further U.S. margin expansion, while EU profitability may have more upside.”

Higher Earnings

InterContinental Hotels, the world’s biggest chain by number of rooms, has climbed 10 percent this year on speculation a two-year decline in earnings will end. Analysts, on average, estimate profits will increase to 87 cents a share in 2011 from 75 cents this year, data compiled by Bloomberg show. InterContinental gets about 55 percent of its sales in the Americas, according to data compiled by Bloomberg.

Puma, Germany’s second-largest sporting goods maker, will return to profit growth in 2010, analysts estimate, after the company’s earnings shrank by half in the previous two years. The stock is up 8.3 percent this month. About 46 percent of Puma’s revenue comes from outside Europe, the data show.

Chris Turner, the strategist at London-based Lombard Street Research who recommended equities on March 11, 2009, isn’t as bullish. “The overall equity call looks much less clear now” after valuations rose, he said.

Index Valuations

The Stoxx 600’s price has climbed to about 13 times the estimated earnings of its members from 7.7 times in November, according to data compiled by Bloomberg. The S&P 500 is valued at 14.8 times estimated 2010 earnings, the data show.

While the U.S. economy is forecast to expand by 3 percent this year, growth will total 1.2 percent for the U.K. and countries that share the euro, Bloomberg data show.

The Stoxx 600 rallied 62 percent since reaching a 12-year low of 157.97 on March 9, 2009, as governments guaranteed or spent more than $11 trillion to end the recession. The measure rebounded 8.1 percent from a three-month low on Feb. 5, 2010, after the Greek government pledged 4.8 billion euros ($6.6 billion) in budget-reduction measures, the third round this year.

Concern about Greece caused the index to drop 8.8 percent between Jan. 19 and Feb. 5 as investors speculated that widening deficits across Europe would weaken the region and drag down the global economy.

Budget Gap

Fitch Ratings warned March 9 that the British government must reduce its budget gap at a faster rate because the country’s credit profile has deteriorated “pretty sharply,” according to a presentation in London. The U.K. Treasury predicts the deficit may reach 12.6 percent of GDP in the fiscal year through March, almost the same proportion as Greece’s 12.7 percent.

The euro’s decline wasn’t enough to keep German exports from slumping in January, ending four months of gains. Sales abroad plunged 6.3 percent from the previous month, the Federal Statistics Office in Wiesbaden said March 10. Matejka made his bullish recommendation in March 2009 amid worsening economic signals.

“The consensus call a year ago was that we were in a structural deleveraging environment, very negative for risky assets; the earnings downside was likely to continue,” said Matejka, who forecasts the MSCI Europe Index may rise 14 percent through the end of 2010. “The general opinion was that there was no point in sticking your neck out because we were in a long-term bear market.”

Not Alone

While Harnett and Matejka were among the few strategists to call the bottom in stocks last year, they’re not alone this time. The average estimate in a survey by Bloomberg last week of Morgan Stanley, Citigroup Inc., Goldman Sachs Group Inc., Bank of America, Royal Bank of Scotland Group Plc, Exane BNP Paribas and Barclays Plc calls for gains in European stocks through Dec. 31 of 7.9 percent.

Georg Von Wyss, manager of Braun Von Wyss & Mueller AG’s Classic Global Equity Fund, Western Europe’s best-performing global equities fund in the past year, says it’s getting harder for investors searching for bargains. Still, on a “medium-term view,” he is optimistic about the outlook for stocks.

“We have some leeway to raise cash, but are still fully invested,” Von Wyss said in an interview from Zurich. The fund’s 124 percent rebound in the past 12 months has made it the best performer among 216 similar funds tracked by Bloomberg. “A lot of the problems we have now, we’ll muddle through.”

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.