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Eurozone Aggravation? Sell These 3 Stocks

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The German national football team netted 7 goals against Brazil in the FIFA 2014 World Cup semi final match to reach the final. However, Germany’s recent economic data is hardly a reflection of its performance in the soccer mega event. In fact, there are too many concerns surrounding the continent now given its business activity witnessing the slowest pace in six months. Also, USA or the Asian nations may not boast a great Wolrd Cup performance, but they have outperformed the Eurozone in terms of business activity.

Europe vs. the U.S. and Asia

Eurozone recovery seems to be losing momentum as the continent’s key business activity indicator showed a decline for the second consecutive month. The reading of Markit's Composite Purchasing Managers' Index (PMI) dropped to 52.8 in June from 53.5 a month ago.

The drop in Eurozone’s business activity is in sharp contrast to the expansion in manufacturing activity in the U.S and Asia. While Markit’s final Manufacturing PMI for the Eurozone was down to 51.8 in June from 52.2 in May, the same for the U.S. was at 57.3 in June – the highest reading since May 2010. Both China and Japan showed improvement in their manufacturing activity in June.  

The reading certainly creates enough jitters given the fact that the PMI is largely considered to be a guide to the real economic picture.

Separately, Europe’s key indices DAX (^GDAXI), FTSE 100 (^FTSE) and CAC 40 (^FCHI) have managed year-to-date gains of 4.3%, 0.0% and 3.1%, respectively. In contrast, America’s indices S&P 500 (^GSPC), Dow Jones Industrial Average (^DJI) and NASDAQ Composite (^IXIC) have added 7.7%, 3.3% and 6.6%, respectively, so far this year.

Given the economic weakness, exiting certain underperforming European stocks would be a prudent move. Before we suggest offloading 3 such stocks, let’s dig a little deeper into the facts.

Asia’s Manufacturing Activity Gains Momentum

A survey showed improvement in China’s manufacturing activity in June for the first time in six months. Final reading of the HSBC/Markit’s PMI rose to 50.7 in June from May’s reading of 49.4.

Japan’s manufacturing activities also expanded in June. The final Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 51.5 in June, more than June’s preliminary reading of 51.1.

Europe’s Manufacturing Slows

A reading of PMI above 50 suggests expansion. However, the optimism fades when one learns that this was the second consecutive month of decline.

Germany posted its Manufacturing PMI of 52, suggesting expansion. However, this dropped to an eight-month low. Incidentally, Germany has been among the top-performing European teams in the 2014 FIFA World Cup and progressed to play the final match. However, it lagged the Manufacturing PMI readings of Ireland (55.3), Spain (54.6), Italy (52.6) and Netherlands (52.3).

France, the region’s second-biggest economy, witnessed the sharpest decline in business activity in four months. France’s composite PMI was at 48.1. Services sector reading was at 48.2. Both dropped to a four-month low.

Markit stated: “June saw manufacturing production expand at the slowest pace since September 2013. The weaker trend was most evident in France, which saw output contract for the first time in five months and at the fastest pace during the year-to-date. Slower production growth was meanwhile registered in Germany (nine-month low), Italy, Ireland (both four-month lows), the Netherlands (11-month low) and Greece (three-month low).”

Stimulus Measures

A general perception has been that Beijing’s targeted stimulus actions coupled with improving labor market in Japan have helped boost domestic demand in Asia.

The European Central Bank (ECB) too announced several measures in early June that are intended to boost Eurozone’s recovery. The central bank reduced its key interest rates. The refinancing rate was lowered to 0.15% from 0.25% and the marginal lending facility rate was reduced to 0.40% from 0.75%. ECB also cut the deposit rates to -0.10%; thereby becoming the first central bank to have a negative rate.

Additionally, ECB deployed a series of targeted long-term refinancing operations in an effort to boost bank lending to the non-financial private sector in the Eurozone. The ECB also announced that it will halt sterilizing purchases under its Securities Market Program. The program was launched in May 2010 in order to relieve market tensions by purchasing government and private debt.

Separately, ECB President Mario Draghi said preparations for outright purchases of asset-backed securities have begun. On Monday, he had urged banks to be “particularly watchful” for any “pernicious negative spiral” of low inflation rate and weak lending rates derailing the Eurozone’s recovery. (Read: Mario Draghi Walks the Walk)

Europe Equity Performance Post Stimulus Announcements

Performance of the European key indices has been dismal since Jun 6. The announcements of the stimulus measures have so far failed to provide much momentum to them. German’s DAX has dropped 2.2% from Jun 6 till Jul 8. London’s FTSE 100 has retreaded 1.8% and France’s CAC 40 has slumped 5.2% over the same time period.

Germany’s Economic Woes

Apart from the slow pace of expansion in manufacturing activity, some other economic factors also paint a dim picture. Much like German being the powerhouse of Eurozone, the nation’s football team has emerged the leading European nation in the World Cup. However, the nation’s economy is not doing enough for the region. Some estimates suggest that German may be heading toward a no-growth cliff.

Germany’s economic data is not in line with its performance in the FIFA World Cup. According to the federal statistics office Destatis, exports dropped 1.1% in May and imports were down 3.4%. This was the largest monthly fall since Nov 2012. Destatis also reported Germany’s industrial output to have dropped by 1.8% in May. This was the biggest plunge in 24 months.

Germany’s Economy Ministry further reported a 0.3% drop in production in April and manufacturing production dropped by 1.6%. Germany’s unemployment rate is at 5.5%.

The nation’s GDP expanded at about 0.25% in fourth quarter 2013. Destatis stated: “The price-adjusted gross domestic product (GDP) was by 0.4% higher than in the previous year”. In the first three months of 2014, Germany’s gross domestic product expanded at 0.8%. According to the

Wall Street Journal, many economists are trimming their projections for Germany’s second quarter GDP to 0.1%.

Organization for Economic Cooperation and Development (OECD) also rang a warning bell for the German economy. The gauge of future economic activity of this Paris-based research group predicts economic growth to slow in Germany. Its indicator for Germany retreated for the third consecutive month.

3 European Stocks to Sell

Vodafone Group Public Limited Company (VOD - Free Report) offers an array of products and services, including voice, messaging, data and fixed-line solutions and devices as per customers’ communications needs. However, this Newbury, United Kingdom-based company has been facing significant challenges and carries a Zacks Rank #5 (Strong Sell).

Vodafone’s core European wireless markets are highly matured, given the high subscriber penetration rates. Over the next two to three years, the company will likely struggle to counter declining voice revenues. Further, weak economic conditions have compelled consumers to switch to cheaper alternative services offered by Vodafone s competitors. Similar to other telecom companies, Vodafone is seeing deteriorating revenues due to mobile termination rate (MTRs) cuts, which is a fee that operators charge each other to connect calls). In fiscal 2014, the company lost around £900 million due to reduced MTRs.

The current year growth forecast for the company is a negative 45.8%. Vodafone has lost 17.5% year to date.

Luxfer Holdings PLC (LXFR - Free Report) is a materials technology company specialising in the design, manufacture and supply of high-performance materials, components and gas cylinder.The company’s last reported quarter was a disappointment and the present growth estimates are also dismal. It reported lower-than-expected results for the first quarter 2014. Adjusted earnings of 28 cents per American Depositary Shares (ADS) lagged the Zacks Consensus Estimate of 32 cents per ADS. Compared with the year-ago quarter, the bottom-line result dropped 17.6%.

The current year growth forecast for the company is a negative 3.3%. Luxfer Holdings has lost 11.9% year to date. Luxfer currently carries a Zacks Rank #5 (Strong Sell).

VimpelCom Ltd. is headquartered in Amsterdam, the Netherlands, and is one of the world's largest integrated telecommunications services operators. A major customer of Nokia Corporation’s (NOK - Free Report) Flexi range of basestations, VimpelCom saw its revenues drop by 10% year on year in 1Q14. Service revenue also dropped 10% year on year. Net income attributable to VimpelCom shareholders slumped 90% year on year in the last reported quarter.

The current year consensus estimates have dropped from 89 cents to 69 cents over the last 60 days. Current year growth estimate is negative 27.8%.

The company currently has a Zacks Rank #4 (Sell).


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