Europe's Troubles Could Be an Opportunity

Bruce Rayner, Contributing Editor, Enterprise Efficiency OEM | 4/27/2012 | 25 comments

Bruce Rayner
You should be grateful you’re not a young professional in Spain. And if you are, my heart goes out to you. Spain is the latest poster child for Europe’s fiscal irresponsibility and is increasingly seen as a threat to the stability of the European Union. The country is in recession, its unemployment rate is running at around 25 percent, and it’s facing a housing market collapse reminiscent of the one that forced the US economy to its knees in 2008. Yesterday, Standard & Poor’s downgraded the country’s credit rating two notches to BBB+ status from A.

There’s talk of a banking sector implosion triggered by the collapse of the housing bubble and the prospect of an EU bailout of Spain’s sovereign debt. Spain’s debt woes dwarf those of Greece, so the Euro Zone impact could be significant. The country is in a deep, dark hole that will only get deeper and darker with further austerity measures.

There are ramifications for the economies of Europe’s stronger nations and global partners, including the US and China. Earlier this week, Germany, which is the EU’s largest and strongest economy, reaffirmed its 2012 GDP growth projection of a meager 0.7 percent for 2012 and 1.6 percent for 2013. In contrast, the EU’s executive commission predicted GDP for the 17-nation Euro Zone will post negative 0.3 percent growth this year.

A recent survey of purchasing managers across the EU conducted by London-based Markit Economics found manufacturing output fell to a 34-month low in April. The downturn has been affecting the EU’s periphery nations for a while but now is reportedly engulfing the core Northern European countries including Germany and France.

China’s feeling the pinch. GDP growth for the People’s Republic has been slowing and is attributed to both declining domestic demand and a drop in exports to Europe. GDP growth fell to 8.1 percent in the first quarter of 2012, down from 9.7 percent in the first quarter of 2011.

This morning, the US Department of Commerce reported preliminary GDP growth for the first quarter of 2012 of 2.2 percent, down from 3.0 percent in the fourth quarter of 2011. Some analysts suggest that the European debt crisis may cause a one percent drop in US GDP growth.

The threat of continued instability in Europe has a dampening effect on OEMs that sell into Europe and that have operations on the continent. Ford reported a 45 percent profit decline for Q1 as a result of plummeting sales in Europe. Companies in the Standard and Poor's 500, for example, derive about 14 percent of their sales from Europe.

In many Q1 earnings reports and on analyst calls, CFOs are warning about the dangers of exposure in Europe and are keeping a close eye on developments for Q2 and beyond. National Instruments, for example, expressed “concern” about the continued weakness in Europe in April.

Looking out over the next 6 to 12 months, what do Europe’s woes mean for US OEMs and their supply chains? For companies that sell in Europe, there’s the usual advice to be risk averse. Pay close attention to short-term sales forecasts, be prepared to quickly adjust production and material procurement plans, and keep a close eye on finished goods inventory.

At the same time, there may be strategic opportunities. In fact, now might be a good time to consider acquisitions in Europe. A recent poll of 800 business executives found that three quarters of Asian executives surveyed were interested investing in Europe, and 45 percent actually have plans to do so in 2012. In contrast, only 7 percent of North American executives surveyed have such plans.

Indeed, China’s government and corporate sectors are both taking advantage of opportunities for investment in European businesses in this period of economic contraction, with a focus on Central and Eastern Europe. Case in point is China's Wanhua Industrial Group acquisition of Hungarian chemical company Borsodchem for $1.6 billion, reported yesterday by Bloomberg Businessweek.

Think about it: Now could be the time to take advantage of Europe’s fire sale.

View Comments: Newest First | Oldest First | Threaded View
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tshields   Europe's Troubles Could Be an Opportunity   5/1/2012 3:16:19 PM
Re: I Wonder
Because China's economy is so large, it can be hard to sustain consistent growth. There's a domino effect economically as China relies on much of Europes market for exporting. As Europe begins to recover then China should see an increase in it's export business. Fortunaly the US is diversified in where it gets it's importants and will not be as significantly affected.
eethtworkz   Europe's Troubles Could Be an Opportunity   5/1/2012 10:58:35 AM
Re: How intense is the European Recession gonna get???
David,

Yes that is the eventual end-game(injecting cash into the system).

Just don't feel like we are anywhere close to that point yet.

Also,lets not forget that China,India(most of Asia for that matter) and America are all dealing with Serious(Double-Digit doses ) of Food Inflation today.

If they do inject more cash into the system to save Europe's Bacon today-Its gonna lead to a massive popular Uprising in Asia.

China is already dealing with the fallout of BO Xilai;plus the Communist party is determined to do whatever it can to protect itself and retain power.This means putting  tight control on Inflation ,especially Food and fuel Inflation.

In India the ruling Government is dealing with massive corruption scandals and maddening Inflation.

To get an Idea how brutal it is check this out

http://www.scribd.com/doc/87695628/Double-Digit-Inflation-is-Back-APRIL-2012

In America too,Food Inflation is at crazy Double Digit levels.The way they do it is by first reducing the amount of food sold and then only increasing Prices.So you are actually seeing massive-massive inflation today.

This is the main reason why we have'nt seen QE3 from the US Federal Reserve so far this year.Lets face it its a Presidential Election ,where Gas and Food prices are the major issue(alongwith jobs)-Obama will not let anything come in the way of his re-election chances and further Money Printing[Which will cause Average Gas prices to spike over 4 Dollars/gallon) is going to be a death sentence for his re-election chances.

So I feel they will refrain from injecting any major cash this year.After all when it comes to choosing to save your own Skin or that of some distant country everyone chooses  to save themselves.

Europe still has to crash and burn.We are not there yet.

Regards

Ashish.

 
eethtworkz   Europe's Troubles Could Be an Opportunity   5/1/2012 10:42:15 AM
Re: How intense is the European Recession gonna get???
Syed,

There is one quality that most people need more than any other in the Investing world-Its called Patience.

You have to wait for the right oppurtunity.

Don't worry it will come.

As Buffet keeps saying,you want to buy when there is Blood in the Streets.

We are getting there.

Just be patient.

Ashish.
David Wagner   Europe's Troubles Could Be an Opportunity   4/30/2012 11:44:40 PM
Re: I Wonder
@Rich- We do count them. The numbers are relatively easily available at the labor department site. they track dozens of different unemplyment numbers. It isn't a question of counting them, but which number we focus on.

We focus on the unemployment number we do because it is the best measure of the number of jobs we want to fill versus the number of available jobs (and of course, it looks better politically but that really isn't the only reason).

When you include other types of unemployed (those on disability, for instance) you don't get an accurate count.

And, of course, underemployed have their own problem. I feel underemployed by a billion dollars per year, but i doubt others would agree.
David Wagner   Europe's Troubles Could Be an Opportunity   4/30/2012 11:39:08 PM
Re: How intense is the European Recession gonna get???
@Ashish- I do think the European recession is going to deepen before things imprve, but I actually don't think there is any real reason to panic. China, India, a strengthning US, and Russia have a vested interest in propping it up. They'll inject cash into the system (mostly in the way Bruce describes) that will keep total collapse at bay.
Skr2011   Europe's Troubles Could Be an Opportunity   4/30/2012 10:03:38 PM
Re: How intense is the European Recession gonna get???
It would be a huge understatement to say that there is "financial chaos" in Europe right now. The European financial system is in so much trouble that it is hard to describe. The instant that they stop receiving bailout money, Greece is going to default. Portugal, Italy, Ireland, Spain and quite a few other European nations are also on the verge of massive financial problems. When the financial dominoes start to fall, the U.S. financial system is going to be dramatically affected as well, because U.S. banks have a huge amount of exposure to European debt
Skr2011   Europe's Troubles Could Be an Opportunity   4/30/2012 10:01:36 PM
Re: How intense is the European Recession gonna get???
Monday, April 30, 2012

Oil is down slightly on concerns of growing economic troubles in Europe.

Benchmark U.S. crude lost 59 cents to $104.34 per barrel in New York while Brent crude lost 57 cents to $119.26 per barrel in London.

Prices fell after Spain said its economy has fallen into recession. The announcement is one more sign of economic weakness in Europe, which consumes about 18 percent of the world's oil. Analysts also worry that Europe's growing debts could affect other regions, including the U.S., by sparking another banking crisis.

Meanwhile, the U.S. government says consumer spending grew at a slower pace last month. Retail gasoline prices also fell by less than a penny to $3.82 per gallon

 

http://www.kake.com/news/headlines/Oil_Falls_Near_104_On_European_Economic_Concern__149513525.html?storySection=story
Skr2011   Europe's Troubles Could Be an Opportunity   4/30/2012 9:57:23 PM
Re: How intense is the European Recession gonna get???
I say buy Starbucks stock. Here is why:

Starbucks Corp.'s (SBUX) second-quarter earnings rose 19%, but economic troubles in Europe are hindering its turnaound efforts there.

The coffee giant's European business has been lagging for some time, while growth in the U.S., China and its packaged goods division have propelled profits.

In the latest quarter, Europe reported an operating loss of $5.5 million, with the weakening consumer environment hurting sales, while profit margins were further squeezed by investments to improve its brand image in countries like the U.K. and France.

Coffee is a staple and an affordable lux item. It will come back!

Read more: http://www.foxbusiness.com/news/2012/04/26/starbucks-profit-hit-by-economic-turmoil-in-europe/#ixzz1tZxZvEZv
syedzunair   Europe's Troubles Could Be an Opportunity   4/30/2012 12:23:19 PM
syedzunair
Re: How intense is the European Recession gonna get???
Ashish, 

Doesn't price correction automatically kick in if there are less buyers and more suppliers? I agree with you that prices need to go down I am not sure why haven't gone down already with the current recession. 
eethtworkz   Europe's Troubles Could Be an Opportunity   4/30/2012 9:24:49 AM
Re: How intense is the European Recession gonna get???
Nasimson,

I don't feel sorry rather I am amazed at the  Europeans.

The Entire model of European Growth was based faon Consumption and Devaluing their currencies(if you exclude Germany+Holland+Luxembourg+Finland).

They just kept consuming more than they produced.

How can anyone say such a model is sustainable in the long-run?

After they joined the Eurozone,they no longer had the freedom to devalue their currencies so had to grow and compete especially with the Northern Europeans.

This is something which they failed to understand and appreciate for the longest possible time.

Now France is threathening to cut themslves off from the Outside world(No Trade).

Which the way I look at it works fine for the Rest of the World.Its the French who will regret that they did it.

Ashish.

 
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