Gavekal Capital: Pinpointing The Weakest Industries In Europe

Friday, August 8, 2014

Pinpointing The Weakest Industries In Europe

As we have highlighted recently (see Europe: Short-term Oversold, Detailing The European Correction and Down Days On the Rise In MSCI Europe) stocks in Europe have been under pressure.  We count four industry groups that have tipped into correction territory: transportation, automobiles, food & staples retail and retailing.

Performance
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The three retail sub-industries that have fared the worst are: 1) apparel, accessories and luxury goods, 2) home improvement retail and 3) internet retail.  Over half of the companies that comprise these sub-industries are down over 10% (chart below).

Performance
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We do find these moves to be fundamentally based.  From a bottoms-up perspective, all these retailers (with the exception of Pandora) have seen earnings estimates for the current fiscal year fall over the last six months. Some, such as Adidas or Asos, have seen estimates drop by a third (table below)

Change in FY1 Earnings Estimates
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From the top-down, the consumer discretionary sector in Europe has seen relative earnings and price momentum plunge relative to the MSCI World Index lately.  In the chart below we show the mean earnings estimate for European consumer discretionary sector for the next twelve months overlayed on the price of the country-sector relative to the MSCI World Index.

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The industrial sector is another place we see broad-based weakness also.  We noted above the transportation industry was down 10% YTD, but the capital goods industry isn't far behind, down 8.89% YTD.  There are four sub-industries to focus on here: 1) air freight and logistics, 2) airlines, 3) construction machinery and 4) heavy electrical equipment.  The companies within these sub-industries have experienced a pretty time lately.

Performance
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Here again, from both the bottom-up and the top-down, earnings estimates have been a problem.  Half of these companies have seen their earnings estimates slashed by over 10% over the last six months.

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And, the industrial sector more broadly has been its forward 12 month estimates relative to the MSCI World Index come off by about 7% since April, with relative prices having fallen about 13% over the same period.

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The last group of note is food and staples retailing.  While the broader consumer staples sector has held in relative well, the food retailers have gotten hammered (Russian food import sanctions?).  Below are the members of the European food retail sub-industry, with all having fallen over the last 50 days by a meaningful amount.

Performance
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For all these reasons (and a few more) this is why current year earnings estimates have taken a dive compared to the other MSCI regions over the last three months.  This also goes a long way to explaining why Europe has been the weakest MSCI region lately.

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