Sitting in the banking centers of London, Paris and Zurich, the
top European money managers have all been singing the same tune
lately: "Focus on America." These investment pros were greatly
concerned about the U.S.
a few years ago, but increasingly think that our country represents
the best-multi-year growth opportunities for their portfolios.
They pair that tune with another one: "Get out of Europe."
That's good advice. So far, major European economies have managed
to sidestep the huge boulders being hurled from places like Greece,
Italy and Spain. Not anymore. Even as recent interventionist
measures removed the risk of a major meltdown (for now), the
largest European economies are only now starting to buckle, and
there's a real possibility that they'll endure another tough
You can already see cracks emerging in places like the United
Kingdom, where government spending equates to roughly half of gross
domestic product (compared to about 33% in the United States).
Efforts to shrink the government, however necessary they may be,
are a brake on economic growth. The British economy had been
expected to grow 0.2% in the first quarter, but instead shrank
Meanwhile, the French and German economies had been expected to eke
out very small gains this year, perhaps in the 0.5% to 1.0% range.
Yet recent reports indicate that those forecasts -- just four
months old, are already too aggressive. For example, French polling
firm Insee found that consumer spending plunged in March. An early
read on second-quarter data imply that the French economy has
returned to recession mode for the first time since 2009. Over in
Germany, just 27.6% of consumers expect to maintain their level of
discretionary spending, according to an April survey, down from
38.6% in March. Germany may avoid recession this year, but just
The incipient weakness is due to the fact key trading partners such
as Italy, the Netherlands and Spain are all expected to experience
a moderate to severe economic contraction this year. In effect, a
negative feedback loop between Northern Europe and Southern Europe
has reappeared for the first time since 2009.
In response to the darkening economic picture, talks are set to
commence next month that look for ways to throttle back many of the
painful austerity measures in place, in order to keep the economic
slump from deepening. How the
markets -- and by extension stock markets -- digest the news that
borrowings will remain extremely high is an open question.
For now, the best move is to start reducing your exposure to
Europe. A number of companies in your portfolio likely have a
degree of exposure to the continent, and you can get that
information by looking at a company's
filings with the Securities and ExchangeCommission (they're also
readily available in the
section of corporate websites).
To save you so
me time, I've made a list of companies that get at least 40% of
sales from Europe. If you own any of the stocks in the table below,
then you really need to question the merits of owning them right
The list of companies that derive between 30% and 40% of sales
from Europe is considerably longer, including firms such as
Hewlett Packard (NYSE:
Johnson Controls (NYSE:
Dow Chemical (NYSE:
. It's tough to say on a case-by case basis whether you should
continue to hold these stocks or not, but you should review your
thesis for owning any stock that falls into this range.
In some instances, share prices have already slumped due to weak
European demand. That's surely the case with
, two members of my
$100,000 Real-Money Portfolio
. They are now extremely cheap, both in terms of price-to-earnings
and price-to-book. The proverbial cows are already out of the barn
with these two stocks, so it pays to instead focus on their deep
But you do have to wonder what a yet-weaker Europe means for
companies such as
. These stocks trade right near their 52-week highs.
Risks to Consider:
Upside risks? It's hard to see them. The possible moves to
lighten the austerity push may help stop the bleeding of confidence
and spending, but that's not a strong likelihood.
Action to Take -->
The U.S. economy continues to remain remarkably unscathed, so
Europe's troubles aren't a reason to turn
on U.S. stocks. Still, events can change quickly, and you need to
be prepared to take swift action to lock-in profits if global
financial markets start to grumble.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority owns shares
of F, AA, GOOG in one or more if its real-money or investment
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