DON´T EXPORT EUROPE´S EXPORTERS / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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FEBRUARY 6, 2011, 1:57 P.M. ET.

Don't Export Europe's Exporters .
By MATTHEW CURTIN

Worries over a hard landing for the Chinese economy and rising raw material costs have weighed on the shares of Europe's exporters this year. Capital-goods companies soared in 2010, with the shares rising around 30%, but they have since fallen victim to the most extreme sector rotation in a decade.

Investors have ditched last year's winners in favor of its laggards: financial and energy stocks. But the switch is overdone. There is life yet in European industrial-goods stocks.


Take Atlas Copco, which makes small air compressors. Chief executive Ronnie Leten says the Swedish industrial group's sales are like canaries in a coal mine. Delivery times are short so any falloff in orders signals trouble ahead for the whole group. Yet despite a 7% fall in the shares this year, Mr. Leten says his canaries are flapping nicely.


Chinese growth remains robust, at 10.3% in 2010, driven by high levels of investment. Spending on China's electricity grid—which is set to rise 12% to $56 billion this year, according to Morgan Stanley—is good news for suppliers of transmission and distribution gear like ABB, Schneider Electric, and Siemens.


Meanwhile, for most European exporters their home region and North America remain the most important—and increasingly buoyant—markets. The German, Scandinavian and Swiss economies, with combined output equivalent to China's, should grow 2% to 4% this year. China represented only 8% of Siemens's new orders in the quarter to end-December. Emerging markets likely contributed only a third of BASF's 2010 sales. Volvo sold 40% of its trucks in Europe.


True, inflation could squeeze margins. Industrial commodities prices are up around 56% on average in the past year. Suppliers of big-ticket, strategic items like turbine and train maker Alstom may struggle against Chinese competitors with access to cheap finance. But companies with new products in the pipeline and strong distribution channels should have some power to pass on cost increases.

Even on conservative assumptions, the capital-goods sector is forecast to deliver double-digit earnings growth this year and next. Yet following this year's selloff, the capital-goods sector now trades on an average 13 times forecast 2012 earnings, well below historic levels of 16 times. Another rotation looks likely.
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