This Could Be The Next Headache For Europe’s Stocks

This Could Be The Next Headache For Europe’s Stocks
Reda Farran, CFA

7 months ago1 min

European stocks have generally outperformed this year, propped up by three key pillars: the avoidance of a full-blown energy crisis, the relative stability of the bloc’s banking sector, and hopes that the end of China’s lockdown measures would result in booming sales for Europe’s luxury goods brands. While the first two have held up, the third is looking a little shaky, with recent Chinese data showing scant evidence of the big spending some had hoped for. And now, Europe's firms are contending with a new headache: a weaker dollar.

Since September, the euro, Swiss franc, and British pound have all appreciated by more than 10% versus the dollar, and several analysts say that’s probably just the start, as interest rates top out in the US but keep rising elsewhere. For businesses with overseas operations, a stronger currency at home is a double-edged sword. It helps lower the price of imports – and that’s crucial when companies are suffering from high input costs. But it also makes their products more expensive for overseas buyers, potentially lowering sales. What’s more, it diminishes the value of foreign earnings when converted into the firm’s home currency.

A weaker dollar could spell trouble for a key European stock index (the Stoxx 600), whose companies rely on North America for nearly a third of their sales. As a Goldman Sachs rule of thumb goes: a 10% rise in the euro shaves 2% to 3% off earnings-per-share growth for European firms. But some sectors will be hit harder (black bars), with Europe’s telecom, healthcare, media, and consumer staples names generating the biggest proportion of their revenue from North America.



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