Fed Fuels Optimism for Europe Exporters ECB Failed to Spur

  • Investors see more room for weaker euro to boost profit
  • Banks and firms exporting to U.S. to benefit the most

Janet Yellen gave European equity investors what Mario Draghi couldn’t earlier this month: hope that earnings will get another boost from a weaker euro next year.

While stock traders across the globe cheered the Federal Reserve chair’s first rate hike in almost a decade, those backing Europe’s exporters perhaps cheered a bit harder. The euro fell against the dollar, a move that European Central Bank President Draghi failed to trigger after its last meeting, and stocks completed their biggest three-day jump since August.

Carmakers Volkswagen AG and BMW AG climbed at least 3.4 percent yesterday, while Investec Plc and Man Group Plc advanced 3.6 percent or more. For Romain Pasche, EFG Bank’s head of investment in Geneva, this is just the beginning. He says an improving U.S. economy and the ECB’s long-term support places exporters and financials in the sweetest spot after the Fed move.

“These companies will become even more competitive, they are the first to benefit from U.S. hiking rates,” Pasche said. “The first impact is on the euro-dollar rate, and the dollar should still outperform the euro in 2016.”

European companies with the most exposure to the U.S. have done well this year -- a Morgan Stanley index that tracks them has rallied 15 percent, double the gains for a gauge of those depending more on euro-zone sales. Strategists expect the dollar will stay strong through 2016, with the euro weakening to $1.04 in the second quarter.

Companies on the Stoxx Europe 600 Index will boost earnings by 6.3 percent in 2016, almost double the 3.3 percent increase that’s expected this year, according to analysts’ forecasts compiled by Bloomberg. Profits of automakers will jump 13 percent, after rising 2.4 percent in 2015, the projections show.

The stock gauge slipped 0.6 percent at 8:13 a.m. in London.

Barclays Plc’s William Hobbs says the euro has limited room to weaken more after dropping more than 10 percent this year, while a UBS Group AG report on Thursday recommended that investors turn their focus to companies that benefit from Europe’s domestic economy, forecast to grow 1.7 percent next year. HSBC Holdings Plc says a strengthening of the euro will weigh on earnings in 2016.

“The dollar-euro trade is probably one of the more consensual that I’ve seen and that makes it dangerous to bet on it too strongly,” said Hobbs, the head of investment strategy at Barclays’s wealth-management unit, who recommends investing in banks and says some companies in the periphery are attractive. “A lot of these companies based in Europe are well diversified, global companies.”

Despite some predictions that the Fed’s decision would be priced in, the rally in European stocks and the decline in the euro yesterday showed there was still room for growth for the region’s exporters -- German stocks surged 5.9 percent in three days. Fiat Chrysler Automobiles NV, which gets a majority of its revenue from North America, climbed 4.2 percent on Thursday alone.

“Although everyone was saying that the currency benefit would die down, not only is the euro heading lower now, but it will only stay low versus the dollar,” said Michael Woischneck, who oversees the equivalent of $156 million at Lampe Asset Management in Dusseldorf, Germany. “Exporters in Germany and the periphery will get more of that boost next year. We might get better economic and earnings growth than everyone is anticipating.”

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