ECB plan could boost shares in Europe's weakest companies

Wed Apr 16, 2014 2:07am EDT
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By Francesco Canepa

LONDON (Reuters) - Shares in some of Europe's least profitable and most indebted companies are set to outperform in the coming months if the European Central Bank starts buying corporate bonds to fight the threat of deflation.

The ECB has opened the door to the purchase of asset-backed securities such as secured corporate debt to revive economic activity in the euro zone, a move expected to give fresh impetus to a 20 percent rally in European shares since June.

Buying corporate debt would lower borrowing costs where they are still elevated, such as in southern Europe, bringing relief to companies struggling with high debt piles and meager profits, such as Italian and Spanish banks and French car maker Peugeot


"The companies that tend to benefit from QE are those with very low levels of profits and high financial leverage because, ultimately, QE stimulates growth," Francesco Curto, a strategist at Deutsche Bank, said.

He recommended screening for companies which trade at a low price compared with the book value of their assets - a sign the market is betting on a structural fall in their profits - and which also have high debt, anemic margins and exposure to Europe's own economy.

Of the 17 companies on the STOXX Europe 600 index which trade below book value, have more net debt than equity and convert less than 15 percent of their sales into pre-tax profit, eight are Italian banks and three are Spanish lenders, Thomson Reuters StarMine data showed.

They include Italy's largest and third-largest lenders, UniCredit (CRDI.MI: Quote) and Monte Paschi (BMPS.MI: Quote), and Spain's Banco Popular (POP.MC: Quote).   Continued...

A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski