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European Equity Special - Time to Monitor US Exposure

25/07/2019

This is a good time to monitor European companies' US exposure. This is firstly, because the Fed is about to enter a loosening cycle, potentially putting pressure on the USD, and secondly, because recent developments indicate that US-Europe trade tensions could escalate by year-end. In its latest Equity Strategy – Europe Equity Compass report, in collaboration with Societe Generale Equity Analysts, the bank’s Equity Strategists examine the potential consequences of a weaker USD for European markets and highlight the impact that a US-Europe trade war would have on European sectors.

Weaker USD ahead. Weakening growth momentum and a change in US monetary policy could weaken the USD, particularly at a time when positions remain long the USD versus the EUR. SG expects the EURUSD to reach 1.16 at the end of the year and 1.24 in the next 12 months.

Earnings at risk. With more than half of European companies' revenues generated outside Europe, swings in the EURUSD rate matter for European equities. A bottom-up calculation based on the companies under our coverage indicates that a 10% weakening of the USD (relative to all European currencies) would reduce European equity market earnings by 4%, all else equal.

Which sectors are exposed? The Aerospace & Defence, IT and Automobile sectors look most at risk from a weaker USD according to our bottom-up calculations. Commodities-linked sectors also appear to be at risk, but they should be supported by the positive correlation between commodity prices and EURUSD. Airlines could benefit from lower costs under a weaker USD scenario, while domestic-focused sectors like Real Estate, Banks and Utilities would be relatively immune to USD swings.

Which companies are exposed? Based on data gathered from SG analysts, we highlight 15 names whose earnings would benefit the most (LOWUSD+) and suffer the most (LOWUSD-) from USD weakening. The two baskets' relative performance has been consistent with EURUSD performance over the last 18 months.

US-Europe trade war: impact on European sectors. We explore the impact that SG's equity analysts believe higher US tariffs could have on European sectors. In their view, the sectors that could be most directly affected by a US-Europe trade war are Automobiles & Components, Capital Goods, Airlines, Luxury Goods and Semis.

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About Societe Generale Cross-Asset Research
Societe Generale Cross-Asset Research is composed of more than 200 Analysts, Strategists, Economists and Quant, combining their expertise into ‘Research-based’ and innovative solutions suited to client’ needs: fundamental studies and expert views, investment ideas and long-term strategies, trade ideas and tactical baskets, thematic and systematic indices, quant solutions. On top of its established UK and Western European base, Societe Generale Cross-Asset Research benefits from a global coverage thanks to its presence in the US and in Asia (Hong Kong, Singapore, Tokyo and Bangalore) and Societe Generale local networks in Eastern Europe.

Disclaimer
This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.