LONDON: Behind the facade of Europe’s forecast-beating company earnings, cracks are appearing as exporters start to feel the pinch from regional exchange rate strength against the US dollar.
The euro, Swiss franc and pound sterling are predicted to rise further versus the US currency, potentially spelling trouble for the Stoxx 600 equity index which, according to data compiled by Bloomberg, relies on North America for nearly a third of its sales.
So far, the effect is not fully apparent – despite the euro’s 13% gain versus the greenback since its September low, the majority of Stoxx firms have surpassed first-quarter earnings estimates.
Dig deeper though, and it becomes clear that swathes of companies, especially exporting conglomerates such as Bayer AG and Roche AG, are feeling the pain.
This could ripple out more broadly in the coming months, if support fades from China’s post-Covid reopening, Europe’s hitherto resilient growth slows and the United States tips into a recession.
“Economic strength has disguised the impact of currency appreciation,” said Sharon Bell, a senior European equity strategist at Goldman Sachs Group Inc.
“But it will be coming through, we expect to see more impact in the second and third quarters.”
As a rule of thumb, Bell said, a 10% rise in the euro shaves 2% to 3% off earnings-per-share growth for European companies.
This impact will be increasingly hard to avoid, she said, especially as the bottoming of exchange rates last September sets a steep bar for year-over-year comparisons.
Bloomberg Intelligence sees the euro touching US$1.20 (RM5.45) against the dollar (RM4.54) by the end of the year, while the pound and the Swiss franc are also expected to strengthen versus the greenback.
Analysis of chief executive officer (CEO) calls by Barclays Plc, showed less than 40% of companies now have a positive view on exchange rates, down from over 60% in the third quarter of 2022.
Europe’s telecommunications, health care, media and consumer staples companies receive the greatest proportion of their revenue from North America, according to an analysis by Bloomberg.
For such businesses, strong currencies are a double-edged sword.
They help dampen imported inflation, crucial at a time when companies are reeling from high input costs. But they can make goods more expensive for buyers in other countries, and mean overseas earnings are worth less when translated into the local currency.
Germany’s Bayer, for instance, warned of a €1.7bil (RM8.3bil) exchange rate hit in 2023, with full-year sales potentially coming in at the bottom of a previously forecast range.
CEO Werner Baumann reassured analysts that hedging efforts have been ramped up to protect the bottom line.
At Switzerland’s Roche, which relies on the US market for half its revenue, chief financial officer (CFO) Alan Hippe said first-quarter sales had fallen 3% in constant exchange-rate terms. But taking into account currency moves, the decline amounted to 7%.
Another example is Dutch retailer Koninklijke Ahold Delhaize N.V.
With 60% of revenue coming from North America, CFO Natalie Knight does not expect full-year earnings per share to grow from 2022, citing moves in the US dollar as a reason.
As European boardrooms brood about the impact, dollar-based American investors are revelling in the extra windfall they can earn from the exchange rate translation.
Vanguard’s FTSE Europe exchange-traded fund, the largest unhedged US-based fund geared to European shares, has received over US$19bil (RM86.2bil) this year as investors buy into the region’s stocks. — Bloomberg
