* Goldman recommends selling EM-exposed companies
* EM-focused stocks lag broader European market this year
* Some upside seen in consumer-focused stocks
By Toni Vorobyova
LONDON, July 1 (Reuters) - After years when European
companies have attracted stock investors by scoring sales to
China or Brazil, share buyers are growing cautious.
For investors in developed market shares, especially in
Europe where domestic demand has been particularly weak,
companies with exposure to emerging markets have shown welcome
resilience. The trend has also been visible, if less pronounced,
in the United States.
But the popularity of such bets has pushed up share prices
to levels which analysts say no longer reflect the risks, which
in turn have grown. Chinese factory activity, for example,
slumped to near stagnation levels last month.
The MSCI Europe with EM Exposure index is down around 8
percent so far this year, exceeding a 2 percent fall on the
broad European gauge but losing only half as much
as emerging markets themselves - a disparity that
Goldman Sachs reckons leaves it vulnerable to deeper falls.
"A lot of these companies have become vulnerable in the
short term," said Peter Oppenheimer, chief global equity
strategist at Goldman, which recommends selling a basket of
EM-focused companies against the STOXX Europe 600 index
He cited a deteriorating trend in some commodity-related
sectors and a rise in consumer staples shares to quite expensive
The trend also holds in the United States, where the MSCI
index of EM-exposed U.S. companies has underperformed the
broader U.S. market - albeit to a lesser extent, given a
stronger domestic economy.
The chance of a prolonged emerging markets rout, meanwhile,
has deepened with the U.S. Federal Reserve signalling it will
soon scale back the measures that have held down interest rates
and encouraged investors to pursue higher-risk markets.
"Before, when it was relatively broad-based, you could
almost pick any European company ... Now you are getting a
(more) discerning consumer coming through," said F&C fund
manager Mark Nichols.
His top picks include luxury sunglasses maker Luxottica
and shoemaker Tod's, as well as firms that
offer hard-to-replicate technology such as Finnish lift maker
Kone and France's Schneider Electric.
Meanwhile EM exposure is prompting analysts to downgrade
companies such as British American Tobacco and
temporary power provider Aggreko.
The valuation approach casts the spotlight on materials -
one of the cheapest sectors in Europe and with the second
highest exposure to emerging markets after technology.
Here, though, analysts see a reason for the cheapness,
arguing that emerging markets like China are moving away from
government-fuelled industrial expansion into a consumer-led one.
Autos - favoured by Goldman - and food and staples retail
could be safer bets, while still making more than a fifth of
their revenues in emerging markets and trading at less than 10
times expected earnings for next year, according to Starmine.
In contrast, household and personal products, with similar
levels of EM exposure, trades on 19 times earnings, followed by
semiconductors, with a quarter of sales in developing countries.
Choosing the right emerging market also matters, with ING
Investment Management highlighting Taiwan as offering "good
exposure to steady growth" while others cited South Korea for
its global exposure combined with a current account surplus.
In the past, Fed tightening caused most problems for states
with high external debt. This would include Venezuela and some
Eastern European countries, according to Capital Economics.
The last big sell-off knocked emerging market shares down by
around 40 percent in 2000-2001. In Europe the rout started about
a month later and lasted nearly twice as long, taking almost 70
percent off the value of STOXX 600.
"Emerging markets have always been the litmus test for big
trends in financial markets," said Stewart Richardson, chief
investment officer at RMG. "We worry that the recent volatility
in EM is a sign that the four-plus year trend since the lows in
2009 is being put to the test."
(Additional reporting by David Brett; Editing by Ruth