Presenting Where The Recycled Euro-Ponzi Cash Goes
While European leaders would prefer to eschew concerns about individual sovereign nations' ability to pay, borrow, and spend in favor of an aggregate EU that they believe reflects better in the world comparisons (if any aliens are considering stimulus support we assume), Goldman's Hugo Scott-Gall is out today with his normal compendium of insightful charts. One specifically caught our eye on How Governments Spend as we makes the critical point (from a real money investor and not a talking-head perspective) that it is crucial to look at end-market exposures as well as geography. Investors exposed to consumers in countries facing significant ongoing household deleveraging (ring any bells?) face a demand picture that is likely to be challenging for some time. In his view this is more likely Southern Europe than Northern Europe and his critical point is that while many extrapolate trends in GDP multipliers for corporate earnings expectations, the need to reduce deficits relatively quickly for many European governments will reduce corporate revenue forecasts dramatically relative to empirical ponzi spending habits.
and breaking out the Interest segment specifically...also extremely varied (note Ireland's differential and how its credit is seemingly priced much more in line with its better % of GDP rather than % of revenues)
End market exposures are important for Europe's corporates...
One of the standout observations when looking at debt levels in Europe is how different they are, both between countries and also between different parts of economies. And at times, what is masked by the focus on sovereign debt levels is that other parts of economies can be in relatively good shape e.g. the household sector. The exhibit on the front page provides good color and some surprises too, e.g. Spain currently has low levels of government debt, but Italy stands out as having a very uneven debt profile, with low levels of private sector debt at the individual and corporate level, but very high government debt. Other interesting uneven profiles exist for the Netherlands, which has one of the highest household debt levels, and for Belgium, which is driven by large amounts of corporate debt. Germany stands out, helped to a heavy extent by its less leveraged corporate sector, while Finland typifies the Nordic region's relatively lower government debt levels.
...and what this means for corporate earnings...
Exposure to government spending in the case of governments that are seeking to reduce deficits quickly will hurt demand. All of these factors help inform revenue forecasts, and highlight that not all of Europe is moving at the same pace. There are pockets of stronger and weaker demand, and understanding this is crucial in formulating earnings forecasts; e.g. northern European versus southern European consumers; corporate demand from companies reliant on southern Europe's banking system is likely to be weaker than for those in the north. All of this is borne out in terms of consensus earnings revisions, with companies having governments as a high relative exposure seeing their 2012 EPS estimates being brought down by 5% over the last several months.
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