In this article, we discuss 10 European stocks to sell before the recession starts. If you want to skip our discussion on the economic situation in Europe, go directly to 5 European Stocks to Sell Before Recession Starts.
According to the chief economist of Nomura Holdings, a majority of the world’s top economies will enter a recession within the next year as the monetary policy gets tightened by central banks to combat rising inflation. On July 21, interest rates were risen by 50 basis points by the European Central Bank in line with its anti-inflationary stance. However, this move is being viewed as insufficient by analysts to address the multiplicity of economic problems being faced by the eurozone currently.
Europe is expected to experience a serious economic contraction in the near term. One of the factors contributing to this is Russia squeezing the natural gas supply to the continent in retaliation for the region supporting Ukraine and for placing embargoes on Russia. Numerous notable companies like the Coca-Cola Company (NYSE:KO), McDonald’s Corporation (NYSE:MCD), and Starbucks Corporation (NASDAQ:SBUX) have already exited Russia. Until alternative supplies are not secured, heavy industries in Europe could have a tough winter season ahead as their production and output could suffer due to a shortage of natural gas. Russia has already reduced its natural gas supply to Germany to just 20% of its capacity since July 25. Although Russia is claiming the cut down in supply is due to technical reasons, Germany is not accepting this claim and calling it a farce.
Europe is in a precarious situation as the continent is facing rampant inflation. The UK saw its inflation rise to a four-decade high of 9.4% in June 2022. Meanwhile, the conflict between Russia and Ukraine is taking a heavy toll on the supply chain that was already strained by the COVID-19 pandemic. Following Brexit, Germany has become the focal point of Europe. The largest economy in Europe is considered the driving force behind the continent’s economic expansion or contraction. Germany imports 66% of its natural gas from Russia and is concerned about how it will survive in case of a gas shortage. The heavy industries would have to make a sacrifice as priority will be given to residential users and critical facilities like airports and hospitals.
An Uncertain Future
S&P Global Market Intelligence sees a contraction in real GDP during Q2 2022 across key European economies like Italy, Netherlands, Spain, and the UK. One of the few silver linings is the recovery in tourism and consumer services that could give the region a lift during the summer months. On the other hand, Q4 2022 can become the most difficult period for Europe because of unreliable energy supplies due to extreme winters. Rising natural gas prices will result in higher electricity prices, which will make Germany less competitive on the global stage. Real GDP growth in Europe is expected to slow down from 5.4% in 2021 to 2.5% in 2022 and then to 1.2% in 2023 before recovering to 2% in 2024.
Europe is already preparing itself for the tougher winter months ahead by securing big shipments of LNG from the Middle East and North America. However, this is a short-term and expensive solution. In the long run, Europe needs to come up with low-carbon and domestic energy alternatives that can be deployed on a mass level. Nuclear power is an option, but at present, the risks of producing electricity from nuclear sources outweigh the benefits.
The recovery of the entire world following the COVID-19 pandemic stands in the balance, and it heavily depends upon how Europe performs in the coming months. Equity markets are always considered the bellwether of the economic outlook. Since June 1, SPDR EURO STOXX 50 ETF (NYSEARCA:FEZ) has experienced a decline of over 10%. Meanwhile, the S&P 500 Index and the Nikkei 225 have observed an increase of 0.3% and 1%, respectively, during the same period.
Luis Louro / shutterstock.com
Our Methodology
For this article we selected the European stocks most vulnerable to a possible recession. These stocks have bearish ratings from market analysts and have a high exposure to recession-sensitive market dynamics.
10 European Stocks to Sell Before Recession Starts
10. adidas AG (OTC:ADDYY)
adidas AG (OTC:ADDYY) is a German sportswear manufacturer that is known for designing and manufacturing clothing, shoes, and accessories.
On July 29, Zuzanna Pusz at UBS downgraded adidas AG (OTC:ADDYY) stock from a Buy to a Neutral rating and lowered the target price from $176 to $88. The revised target price provides a potential upside of only 3.7% from the closing price as of August 2. The analyst sees the 2025 targets set by adidas AG (OTC:ADDYY) as unachievable, following another warning of lower-than-expected profits.
Pusz also added that the company’s new “Own the Game” growth strategy did not work well with consumers. The new strategy was rolled out in March 2021 to increase sales and gain market share by shifting towards a direct-to-consumer (DTC) business model and doubling its e-commerce sales by 2025. However, adidas AG (OTC:ADDYY) hasn’t been able to execute the strategy successfully till now.
adidas AG (OTC:ADDYY) was discussed in the Q1 2022 investor letter of Oakmark Funds. Here’s what the investment management firm said:
“adidas (NYSE:ADDYY) (Germany) is a global sportswear company. The business is a leader in athletic footwear and apparel with a brand quality that helps to drive superior sales and margins across multiple segments and geographies. In our view, adidas’ shift to a vertical-based model in the past several years led to superior innovations and more consistent product development. Moreover, we believe the improved product, brand perception, sales and profitability have positioned the company well. We think sustained investments in brand, product and distribution should support above-market growth rates and improved margins moving forward. We also appreciate that CEO Kasper Rorsted executed structural changes decided before his arrival, which should lead to improved growth, margins and capital management.”
9. Zalando SE (OTC:ZLNDY)
Zalando SE (OTC:ZLNDY) is a German online retailer of beauty, fashion, and footwear with a presence in all the prominent European nations.
On June 24, Guido Lucarelli at Citi lowered the price target on Zalando SE (OTC:ZLNDY) from $18.82 to $14.24 and reiterated a Neutral rating on the stock. The target price represents a potential upside of 7.7% from the closing price as of August 2. The multi-brand fashion platform has been working on launching itself in the US for the past several months. This revelation was made in a report published in Business Insider on August 1. Zalando SE (OTC:ZLNDY) had been working on “Project Kangaroo” in secrecy and was lining up a launch in early 2023. However, it has been revealed that Zalando SE (OTC:ZLNDY) has shelved these plans as the firm intends to focus on its existing markets.
The company’s management believes the high levels of inflation are going to persist for a long period of time and that European consumer confidence is unlikely to rebound in the near future. The bearish outlook has led Richard Edwards at Goldman Sachs to see the company’s near-term earnings visibility as lacking.
8. InterContinental Hotels Group PLC (NYSE:IHG)
Number of Hedge Fund Holders: 6
InterContinental Hotels Group PLC (NYSE:IHG) is a UK-based hospitality company and a part of the prestigious FTSE-100 Index.
InterContinental Hotels Group PLC (NYSE:IHG) announced on June 27 that it would cease its operations in Russia after the embargoes placed by the UK, US, and the EU made it very challenging to continue business in the region. Earlier, companies like the Coca-Cola Company (NYSE:KO), McDonald’s Corporation (NYSE:MCD), and Starbucks Corporation (NASDAQ:SBUX) had also suspended their operations in Russia. The demand for hotel booking is expected to be dented by inflationary pressures as people are likely to find alternative lodging options, available on online marketplace like Airbnb, Inc. (NASDAQ:ABNB), more affordable.
Furthermore, the COVID-19 lockdowns in China could adversely impact InterContinental Hotels Group PLC’s (NYSE:IHG) Q2 2022 results. The company is heavily reliant on growth from China as it has reached maturity in the African, European, North American, and Middle Eastern markets. Jamie Rollo at JPMorgan has given InterContinental Hotels Group PLC (NYSE:IHG) stock a Neutral rating with a target price of $71 in a research note issued on May 9.
7. ING Groep N.V. (NYSE:ING)
Number of Hedge Fund Holders: 11
ING Groep N.V. (NYSE:ING) is a Dutch diversified financial services firm involved in asset management, banking, and insurance services across the world.
Experts think that the diversified financial services firm has one of the highest interest rate sensitivities amongst the European banks. Since the start of 2022, the stock price of ING Groep N.V. (NYSE:ING) has lost 30% of its value as opposed to a 23.3% decline for the SPDR EURO STOXX 50 ETF (NYSEARCA:FEZ).
ING Groep N.V. (NYSE:ING) has also seen a significant increase in short interest in July. The short interest has increased from 6.18 million shares to 8.65 million shares as of July 15, reflecting an increase of 40%. ING Groep N.V. (NYSE:ING) is also one of the stocks Ray Dalio’s Bridge Water Associates went short on.
In Q2 2022 results, ING Groep N.V. (NYSE:ING) revealed that it had reduced its exposure in Russia from €6.7 billion at the end of February to €4.6 billion as of June. Furthermore, the company reported that its lending business declined in profitability compared to the first quarter of the year due to slower growth in net interest income.
6. Banco Santander, S.A. (NYSE:SAN)
Number of Hedge Fund Holders: 15
Banco Santander, S.A. (NYSE:SAN) is a Spanish diversified financial services firm. It is the sixteenth biggest financial institution in the world, based out of Madrid.
On July 29, Timo Dums at DZ Bank downgraded Banco Santander, S.A. (NYSE:SAN) stock from a Buy to a Hold rating and gave the stock a target price of $2.74. Banco Santander, S.A. (NYSE:SAN) is facing a macroeconomic headwind in the form of higher taxes imposed on banks by the government of Spain. The taxes are intended to provide relief to consumers in times of high inflation. The government expects the levied tax to generate $7.02 billion in the next two years. However, the tax will have a strong adverse impact on the bank’s margins.
Banco Santander, S.A. (NYSE:SAN) is looking for new growth avenues. On July 29, the company reported that it would start to provide cryptocurrency trading services to its clients in Brazil. However, Banco Santander, S.A. (NYSE:SAN) would require a considerable period of time to establish its position in any other sector, given the economic situation.
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Disclose. None. 10 European Stocks to Sell Before Recession Starts is originally published on Insider Monkey.
