* Companies with exposure to China feel earnings pinch
* For many, share price has yet to react
* Top analysts expect sharper EPS fall in China-exposed
* No surge in shorting of emerging market-focused stocks
By David Brett
LONDON, Oct 18 (Reuters) - European firms with exposure to
China are feeling the pinch on earnings as economic growth there
wanes, but many have yet to suffer a corresponding drop in stock
market valuation - making their share prices ripe for
Companies globally, in fields from mining to handbags, have
been tapping into a growth "supercycle" in China for years,
banking on an eventual explosion of middle-class consumption.
But that breakthrough has yet to happen, and growth rates in
the world's second biggest economy have dropped this year. They
inched back up to 7.8 percent in the third quarter but momentum
looks to have slowed again since, data showed on Friday.
"These stocks have been valued highly in the past but now
they are negatively impacted by the fact that China is slowing,"
said Claudia Panseri, global equity strategist at Societe
Generale Private Banking, adding their underperformance could
stretch into the fourth quarter and beyond.
Third quarter warnings over the outlook in China from the
likes of Burberry, Danone, LVMH,
Publicis and Unilever have seen
their share prices drop by up to 10 percent.
But a broader market reaction has yet to kick in.
The warnings have led analysts whom Reuters StarMine data
ranks mostly highly for earnings forecasts to cut estimates for
European companies that rely on Chinese demand. Many
lower-ranked analysts have yet to follow suit, meaning the gap
between the two groups' sets of forecasts has widened.
Similarly, there has to date been little or no build-up of
longer-term negative bets on China-exposed stocks.
"Commodities have already begun to price in this slowing
demand but there are other stocks, which are exposed to the
emerging market growth story that are trading very expensively
and are starting to disappoint," Emmanuel Cau, strategist at
He said valuations and earnings expectations looked
stretched in the chemicals, capital goods, luxury goods and
"These sectors are still expensive in historical terms and
consensus is still expecting relatively high earnings and
margins for the next few years, but I don't think you can buy
these sectors on the expectation that the last few years of
earnings growth can be delivered forever."
A basket of 20 of Europe's largest listed companies with
strong exposure to China and other emerging markets has lagged
the broader STOXX 600 by just 2 percent in the last 30
MORE DOWNGRADES, LESS MOMENTUM
There has also been little change in short interest
-indicating whether investors think a share price is likely to
fall - in firms directly impacted, such as Burberry and LVMH.
To short a stock, investors borrow shares and sell them in
the hope of being able to buy them back more cheaply when they
need to repay the loan. While borrowing in LVMH has risen from
low levels since early September, borrowing of Burberry shares
has fallen 80 percent, according to SunGard's Astec Analytics.
"This fall in borrowing when share prices slide tends to
suggest that short sellers are seeing the price move as fair
value, so feel there is less room to the downside for them to
make money," Karl Loomes, market analyst for SunGard, said.
But top-ranked analysts covering Asia-focused stocks predict
2014 revenues and earnings will miss consensus forecasts by 1.4
percent and 2.8 percent respectively, compared with a 0.2
percent and 0.7 percent miss for the broader STOXX Europe 600
, according to StarMine data.
They have also been more active in downgrading the
Asia-focused basket in the last 90 days with the stocks
suffering 36 downgrades to recommendations, exceeding upgrades
by 45 percent.
Starmine's Value-Momentum measure, which identifies stocks
that are cheap for a reason rather than underpriced, has been
slowing for such shares, leaving them on a lower average (40 out
of 100) than the broader index of European peers (55/100).
This suggests that, while the stock prices are falling, they
still do not represent fair value - which doesn't mean an
eventual rebound isn't on the cards.
Neil Shah, director at Edison Investment, said the market's
relative calm, particularly towards consumer-focused stocks
exposed to China and other emerging markets reflected the
longer-term prospects for the region.
"Everyone is focusing on the long game and rightly so. The
market is being sensible," Edison's shah said.
"Short-term data is always going to cause blips ... but
unless we see a fundamental turnaround in some very big trends
of the rising middle class, it is unlikely that the long-term
market view will change."
(Editing by Nigel Stephenson, John Stonestreet)