Europe Stock Investors Fail to Buy Emerging-Market Optimism

  • Weak currencies hurting Europe sales to developing nations
  • Carmakers remain among year's worst Europe performers

Investors in European companies reliant on developing nations for revenue are proving less bullish in the prospects for a rebound in emerging markets than firms including Citigroup Inc. and Fidelity Investment Management.

The region’s shares with the highest exposure to developing countries trade near record lows relative to those reliant on Europe and the U.S., according to Morgan Stanley indexes. Despite a rebound since last month’s low, concern lingers that China’s economy will continue to slow, while a slide in emerging-market currencies may curb sales for companies dependent on those nations. The benchmark Stoxx Europe 600 Index fell 0.4 percent at 9:37 a.m. in London.

“On the one hand, you see the recovery starting and brokers becoming more constructive on emerging markets, but it probably needs more before investors jump on this wagon and adjust European portfolios accordingly,” said Christoph Riniker, Zurich-based head of strategy research at Julius Baer Group Ltd. His firm manages the equivalent of $301 billion. “There’s still uncertainty whether this is just a bullish phase within a downtrend or a trend upwards.”

Economists have slashed forecasts for growth in emerging markets to 4.4 percent for this year, the slowest since 2009, while they expect the euro-area economy to expand at its fastest pace in four years. In the last 12 months, the Morgan Stanley index of European stocks with the highest exposure to developing nations has tumbled 27 percent, compared with a drop of less than 10 percent for similar gauges tracking those dependent on domestic markets or the U.S.

“There is a persistent trend to cut growth estimates in emerging markets, and this makes investors very pessimistic,” said Christian Stocker, a strategist at UniCredit Bank AG in Munich. “Consumption in Europe is just much stronger and the economy is doing better at the moment.”

It’s clear when looking at carmakers: those in the Stoxx Europe 600 Index have tumbled 12 percent this year, posting some of the biggest declines in the region amid growing concern that slowing demand from China will hurt companies such as Daimler AG and BMW AG. LVMH climbed 7 percent, boosted by profits that beat estimates thanks to “strong progress” in U.S. and Europe markets.

Lampe Asset Management’s Michael Woischneck says his strategy is to be selective in picking stocks exposed to emerging markets, rather than shun them all. He bought European auto-related and luxury shares in January. And while he reduced his holdings of Banco Santander SA because of its exposure to Brazil, he held on to Banco Bilbao Vizcaya Argentaria SA for its reliance on Mexico, whose economy is growing. BBVA has declined 8.2 percent this year, less than Santander’s 11 percent drop.

“You need to take advantage and use this opportunity of this really great growth potential in emerging markets,” said Woischneck, a fund manager who oversees the equivalent of $156 million at Lampe in Dusseldorf, Germany. “These markets always suffer more than developed ones in crisis. You need to be prepared to add some more on weakness.”

Mining shares are another example. After plunging to their lowest prices since 2003 in January, they have surged 37 percent, becoming the best performers in the Stoxx 600 amid a rebound in commodities.

A weaker dollar will favor developing-nation equities, Citigroup said last month, while Fidelity Investment Management cited their attractive valuations. Goldman Sachs Group Inc. predicted a relief rally in Chinese stocks will continue as economic data show stabilization in the short term.

Still, Lombard Odier’s Samy Chaar, is among those who aren’t convinced that oil prices have stabilized enough to recommend buying European companies with exposure to emerging markets -- or stocks from those countries for that matter.

“It’s not only a question of value, it’s also a question of strong economic fundamentals, and we can only have that if the commodity prices stabilize,” said Chaar, a Geneva-based strategist at Lombard Odier, which manages $173 billion. “As a stock owner you’re interested in where the growth is coming from. In this cycle, most of the growth for companies comes from the developed Western economies.”

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