Eurozone Recovery Stalls in Q2: 3 Stocks to Sell Now - Analyst Blog

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Hopes of economic recovery in Europe received another jolt last week. The Eurozone, the 18 nation bloc that comprises some of the behemoths, saw its second quarter GDP growth stagnating. This comes along with a 0.2% contraction in Germany's economy and Italy sliding to recession. The dismal data comes at a time when Europe's banking sector concerns have intensified following the crisis surrounding Portugal's banking giant Banco Espírito Santo.

The zone's manufacturing activity has also been choppy. Ahead of the GDP data, the European Union's (EU) statistics agency had reported the second consecutive month of decline in industrial production in the 18-nation bloc. Evidently, the economic recovery is fast losing momentum. In any case, it is debatable whether a recovery began at all.

Euro Area Sees Zero Growth; Germany Contracts, Italy Slips into Recession

According to the European Union's Statistics Office, economic growth in the euro area stalled in the second quarter. The zero growth reported by Eurostat was in contrary to expectations of a 0.1% increase. GDP had increased 0.2% in the Eurozone in the first quarter. Eurozone's $13 trillion economy contributes 17% of the global gross domestic product.

The powerhouse Germany saw a surprise dip in its GDP - the first one in over 12 months. Germany's Federal Statistics Office reported a 0.2% contraction in second quarter. The economic contraction between April and June compared unfavorably to expectations of zero growth. The Statistics Office also revised down first quarter numbers to 0.7% from 0.8%. Nonetheless, the second quarter contraction is a lot to worry about when juxtaposed against first quarter numbers. It was also reported separately that Germany's inflation dropped to the lowest since Feb 2010, at 0.8%.

The surprising Germany contraction was largely an outcome of high level of trade deficit. Declining investments, more so in the construction sector, dragged the GDP to the red.

Eurozone's third-largest economy, Italy, slipped into recession after its GDP shrank 0.2% in the second quarter. A Reuters poll had been expecting a 0.2% gain. This was the third instance that Italy slid into recession since 2008. Prime Minister Matteo Renzi now faces severe pressure to implement the structural reforms.

"Growth Broken Down" in France

France, which along with Germany, contributes 66% of the bloc's GDP saw zero growth in the second quarter. France's Finance Minister Michel Sapin said "growth has broken down, in Europe and in France." The country also cut its 2014 and 2015 growth forecasts and said it will fail to meet the deficit targets this year.

National statistics office INSEE reported zero growth in the second quarter, mirroring the flat growth also recorded in the first quarter. This makes things difficult for the nation to achieve a 1% growth. The French government halved its 2014 growth projection of 1%. The 1.7% forecast for 2015 was also shunned.

As for trade deficit target, it is unlikely that France would bring its deficit down to 3% by year end and as it had promised to the EU. The sluggish growth and "insufficient inflation" will keep France away from meeting public deficit target in spite of spending control. Sapin said that France will cut its deficit "at an appropriate pace," and revised France's public deficit up to over 4% of GDP this year.

France Blames ECB of Foot-Dragging

Meanwhile, Sapin has blamed the European Central Bank (ECB) for France's failure to meet the deficit target. Speaking to Europe 1 radio, Sapin said: "We must adapt the pace of deficit reduction to the exceptional situation... of growth that is too weak everywhere in Europe and the exceptional situation of inflation that is too weak across Europe."

Sapin has also urged ECB to be more active to offset deflation threats and to boost growth. Sapin said that the region requires monetary policy "adapted to the exceptional situation of weak growth and weak inflation across the Eurozone."

Surviving "External Shocks"

Every quarter of dismal growth in the Eurozone exposes its vulnerabilities. The region has been subjected to weak banking system, disappointing manufacturing activity and dismal labor force. In addition, the geopolitical concerns, considered as "external shocks," make the situation murkier.

For instance, the Russia-Ukraine crisis is far from resolved. The ensuing standoff with the greater part of the international community has led to many sanctions. These sanctions affect not just Russia's business, but they also hamper trade relations a great deal.

A recent example is Russia's food import ban in retaliation to the widening of sanctions by the European Union and the U.S. New sanctions restrict Russia's largest banks from raising finances in the European Union and place a trade bar on arms. In response, Russia has banned a wide range of food items, ranging from fruits and vegetables to meat and poultry.

This ban will hurt European fruit and vegetables markets deeply; Russia is the biggest importer of European fruits and vegetables. However, the recent figures from Eurostat exclude the period of the deteriorating ties between EU and Russia.  

The slowdown in global trade and improved business for emerging markets are add-ons to the plight of European exports.

Portugal's Banking Woes

Last month, Portugal's Espirito Santo International, which is the biggest shareholder in Banco Espirito Santo (BES), halted trading of its shares and bonds as the parent company Espirito Santo International (ESI) allegedly defaulted on a debt payment. It was also accused of accounting discrepancies.

Also, BES, one of the biggest banks in Portugal, had incurred a loss of €3.58 billion in the first half of 2014 - the biggest loss in Portuguese banking history. The central bank announced it will split BES into a "good bank" and a "bad bank." The "good bank" will receive a bailout of €4.9 billion from the bank resolution fund. Out of this, €4.4 billion will be provided by the Portuguese government as a loan and the rest as cash.

The "good bank" will be called Novo Banco. BES' potential assets such as deposits and loans, which can be repaid, will accrue to the "good bank." BES will become the "bad bank."

The "problem" assets of the bank will remain with BES. Shareholders and the creditors will be liable for these assets and may lose all of their investments. The Espírito Santo Financial Group, which is one of the owners of BES, and Crédit Agricole (one of the biggest French lenders) are among those which stand to lose.

Meanwhile, The ECB has decided to create a unified watchdog for all Eurozone banks before the end of the year. All 28 members of the EU will also undergo stress tests to determine how they would respond to another economic slowdown and a slump in the markets. (Read: Stress Tests Ahead: 3 EU Banking Picks )

3 European Stocks to Sell Now

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Here we will suggest 3 stocks that carry either Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell). These stocks also have negative returns year to date and has been witnessing negative earnings consensus estimate revision trends for the current quarter and year.

Safe Bulkers, Inc. ( SB ) is an international provider of marine dry bulk transportation services, transporting bulk cargoes, particularly grain, iron ore and coal, along worldwide shipping routes for some of the world's largest consumers of marine dry bulk transportation services. Based in Greece, the company had a fleet of 30 dry bulk vessels as of Feb 25.

Safe Bulkers currently carries a Zacks Rank #4 (Sell). The stock has lost 13.3% year to date. Consensus estimate for current quarter and year moved down by 53.8% and 29.8%, respectively, over the last 30 days. The current-year growth estimate is a negative 58.7%.

GlaxoSmithKline plc ( GSK ) offers pharmaceutical and other health-related consumer products. GlaxoSmithKline has its R&D centers in the UK, U.S., Spain, Belgium and China and is focusing on countries that offer high-growth potential. Headquartered in the UK, the company reported a 12% drop in second quarter 2014 earnings. The company does not anticipate revenue growth in 2014.

GlaxoSmithKline currently carries a Zacks Rank #5 (Strong Sell). The stock has lost 10.3% year to date. Consensus estimate for current quarter and year moved down by 4.8% and 7.8%, respectively, over the last 30 days. The current year growth estimate is a negative 7.4%.

Frank's International N.V. ( FI ) is a provider of engineered tubular services to the oil and gas industry. It provides its services to exploration and production companies in both offshore and onshore environments, with a focus on complex and technically demanding wells. The company is headquartered in the Netherlands.

Frank's International currently carries a Zacks Rank #4 (Sell). The stock has lost 23.1% year to date. Consensus estimate for current quarter and year moved down by 11.8% and 8.5%, respectively, over the last 30 days. The current year growth estimate is a negative 32.3%.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: EU , ESI , GSK , FI , SB

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