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LONDON: A strong euro has helped US companies extend their sales outperformance over Europe to multi-year highs in the first quarter, according to Reuters data – though experts expect the trend to begin to reverse later this year.
Renewed confidence in the European economy and persistent weakness in the dollar have driven the euro up 16 per cent against the US currency from the first quarter last year to the end of March 2018.
That means euro zone companies reporting first-quarter earnings for 2018 have seen dollar revenues shrink by roughly a sixth in a year.
Some 74 per cent of companies on the US SP 500 that have reported in first quarter have beaten analysts’ estimates for sales, compared with just 22 per cent on Europe’s Stoxx 600, according to data from Thomson Reuters I/B/E/S/.
The spread between the two is the highest since I/B/E/S/ began collating comparable data in the first quarter of 2011.
Exporting heavyweights Daimler, Renault , Continental and Sanofi have all reported hits to their results from the strong euro in the last week.
Euro zone exporters suffer from a strong currency as they make large chunks of their sales and revenues in foreign currencies, which are then worth less when translated back into euros.
The rising euro also results in higher costs and a pressure to raise prices, potentially making exporters less competitive.
Daimler said the strong euro would dampen revenue growth this year, while Sanofi said a stronger euro had a negative effect of 8.3 per cent on sales in the first quarter.
Euro zone industrials, and consumer cyclicals, sectors dominated by exporters, have been delivering weaker than expected first-quarter revenues, Reuters data shows, with some of the biggest negative earnings surprises.
Goldman Sachs analysts said currency effects were to blame for a disconnect between earnings growth beats and stocks’ performance.
“We believe this has been a direct consequence of investors’ concerns about FX downgrades causing further downside risks to earnings,” they said.
Some of the region’s biggest drinks makers all said the strong euro would crimp profits.
Heineken said the strong euro would wipe 200 million euros ($247 million) off operating profit this year based on current exchange rates. In mid-February, it had put the figure at 190 million euros.
Pernod Ricard also increased its estimate of the euro’s negative impact, to 200 million from its previous estimate of 180 million, and Remy Cointreau said foreign exchange movements would knock 17 to 18 million euros off full-year operating profit.
Overall each 10 per cent move higher in the euro takes around 6 per cent off earnings per share (EPS), Credit Suisse analysts said, and 70 per cent of the time the euro has strengthened, euro area equities have underperformed in local terms.
The strong euro is also part of the rationale for some brokers recommending investors shift from the more cyclical parts of the market to defensives, as cyclical sectors are both more exposed to global growth and to the negative currency effect.
The worst could be over for Euro zone exporters, however.
The biggest upward surge in the euro was in the second quarter last year when French President Emmanuel Macron was elected, and Q2 earnings will thus be compared with a higher euro base a year ago.
In addition, the euro has fallen from its mid-February peak, suggesting the pressure could ease.
Analysts at JP Morgan said while the US is strongly outperforming Europe in terms of sales delivery in the first quarter, “the worst of the Euro headwind happened in Q1, and in the second half positive sales surprises should shift from the US to (the) Euro area.”
Some investors were reluctant to make any bets on a reversal of the currency effect, however, arguing the euro alone could not be responsible for the extent of Europe’s underperformance of the United States.
“For us it’s neither here nor there. Even net of any currency effects European markets have been a bit disappointing in the last year or so,” said Kevin Gardiner, global investment strategist at Rothschild Wealth Management.