During the past few months, experts have been slowly ratcheting
down their global economic growth forecasts. A robust first half
rebound is likely to be followed by a second half slowdown. Where
the global economy heads from there is a crucial question for
It all starts with Europe. The economies of the PIIGS (Portugal,
Italy, Ireland, Greece and Spain) are all likely to keep
contracting in the second half, as businesses freeze spending and
consumers stay at home. In Ireland, for example, the nation's
savings rate has soared, which is another way of saying that
consumer spending has ground to a halt.
Meanwhile in places like Germany and France, economic activity is
hanging tough. A recent economic survey of business confidence in
Germany showed impressive gains, no doubt aided by the weaker euro,
which is fattening export profits.
Europe's ability to avoid another recession will greatly depend on
its trading partners in North America and Asia. Then again, China
is counting on Europe to stay in fighting shape to keep sucking in
Chinese imports. Here in the United States, our economic outlook is
increasingly dependent on our trade partners in Europe and Asia. In
effect, we're all hoping and praying that another region doesn't
take us down with them.
More than the currency
In theory, a weaker euro should bring a real tailwind to Europe as
its exports become more competitive. But
only plays a small part in reality. Instead, relative
competitiveness and a business-friendly environment dictate a
country's level of exports. Generally speaking, it is a lot more
cost-effective to produce a manufactured good in Germany than in
Greece. Germany has the transportation links, supply-chain
efficiencies and factory line
to outsell its neighbors to the south.
The PIIGS are learning to improve business conditions by making
sharp government cuts that should eventually lead to lower taxes.
In Spain, labor laws are becoming far more flexible and are
encouraging companies to take more chances on payroll expansion.
But there's a real danger that even if Germany and France post slow
or moderate economic growth, their neighbors on the periphery of
Europe will contract and take the entire European Union down with
them. Grumbling from the German or French electorate is likely to
only grow louder. The next time you hear rumors that member states
may move away from the euro, U.S. stocks will again take a hit.
Investors don't like the uncertainty that might create.
The response to the European crisis has not been uniform. The
United Kingdom has announced a massive austerity plan that runs the
risk of forcing the economy into an even deeper hole as taxes
sharply rise and spending is sharply reduced. The PIIGS have no
choice but to be similarly austere, inviting those same concerns.
France and Germany, on the other hand, are moving in a more
restrained fashion. Germany just raised taxes by 11 billion euros,
while France has enacted roughly five billion euros worth of tax
hikes. France and Germany likely wish they were islands unto
themselves right about now. But they know that a divorce from their
neighbors would cause more harm than good.
Action to Take -->
The current crisis spells real opportunity for companies based in
these stronger countries. A weaker currency boosts export prospects
and gives them a chance to make a major push into faster-growing
markets like Brazil, Turkey and China.
For example, U.K.-based
, which makes Captain Morgan, Smirnoff, Johnny Walker and other
spirits, notes that export sales are faring well. Shares are
roughly -30% lower than before the 2008 economic crisis began and
trade for about 13 times projected 2011 profits.
Investors may also want to dig deeper into Luxembourg-based
Arcelor Mittal (NYSE:
, the world's largest steel maker. Shares have lost a third of
their value on fears of slumping demand, but the company is not
seeing much of a slowdown and is well-positioned to capitalize on
rising steel demand in Brazil, South Asia and the United States.
You should also check out Swiss-based
General Electric (NYSE:
of Europe. Goldman Sachs points out that shares of ABB start to
garner a higher
multiple whenever orders exceed shipment (which is known as a
greater than 1.0). But it notes that "the multiple has yet to
ABB's sales are expected to moderately decline this year but grow
by +6% to +8% next year, simply based on the recently building
. If the weaker euro helps boost competitiveness in other parts of
the world, then growth will be even more robust.
-- David Sterman
Disclosure: Neither StreetAuthority, LLC nor the David Sterman
hold positions in any securities mentioned in this report.