Europe Eyes Margin Recovery For Fresh Stock Market Boost

Analysis: Europe’s gas risks to rise as African share increases

The issue is a provision that would impose the levy even if only one of the parties in a transaction is in a country where the law is in effect. Lawyers argue the provision would be “discriminatory,” according to media reports citing the document from the EU council legal service. Related: 11 EU to introduce tax on stock trades The non-binding legal opinion is the latest in a series of obstacles to delay the tax. Some cash-strapped governments in Europe are eager for new revenue sources. There is also popular pressure to make the banking industry pay a bigger share of the cost of dealing with the financial crisis. Yet most of the EU’s 28 member states oppose the tax. The most notable critic has been the U.K., Europe’s leading financial center, saying it would hurt competition, investment and growth. In April, the U.K. government launched a legal challenge to the law amid rising hostility from the financial services industry. Related: Markets warn G20 of EU trading tax risk Nigel Green, chief executive of the deVere Group, a financial consultancy, hopes the lawyers’ opinion will help scrap the proposal for the “reckless” tax. “It is highly likely that the implementation of the financial transactions tax would slash investment activity, fuel job losses, and increase the burden on the end-users of financial services – in effect, adversely affecting the real economy at a time when Europe is desperately seeking growth,” Green said.

Historically, a pick up in margins has been accompanied by continued share price gains. For example, in 2009, margins lagged the equity market pick up by around nine months, but stocks then continued the broad upward trend, adding a further 10 percent in the following year. ( r.reuters.com/tat92v ) Overall, at around 4.9 percent, net margins in Europe are running around a fifth below their 10-year average, according to Datastream, with the economies hardest hit by the euro debt crisis – such as Italy and Spain – showing the biggest gaps. In contrast, in the United States, profitability is already above its historic average. ( r.reuters.com/sat92v ) “In Europe, up to this point, whatever earnings growth you have seen has been driven by cost cutting. Going forward you’ve got a combination of the top line driving earnings and the margin effect,” said Graham Bishop, strategist at Exane BNP Paribas. Margins should be helped by still low interest rates and subdued labour costs against a recovery in demand. Companies which have fixed assets can thus increase sales while keeping costs relatively stable – retailers selling more goods from the same number of shops with the same number of staff, or manufacturers producing more from the same factories. “Retail is the purest (margins) play,” said Exane’s Bishop. On an individual stock level, though, Exane recommends screening for companies with high staffing costs and below average margins, including airport shop operator Autogrill and holiday lets firm Pierre & Vacances. The sectors with the lowest margins relative to history are banks, basic resources, technology, oil and gas , and travel and leisure and utilities. However, investors must also consider issues such as regulation and politics capping utilities’ pricing power. “Sector dynamics can change from one cycle to the next and the next cycle looks more structurally challenged for basic resources, oil and gas and utilities,” analysts at S&P Capital IQ said in a note, rating those sectors ‘underweight’. Among those left, banks combine still relatively low profitability with fixed assets, a high exposure to the economic cycle and cheap valuations.

eu tax on stock trading

This means that Europe’s most reliable supply source – its own North Sea gas – will largely have to be replaced by supplies which the industry considers to be the most unreliable. Analysts say it will increase the likelihood of supply disruptions and result in a risk premium that will be priced into European gas markets. It will also make Europe’s gas market more like oil, which often sees price spikes due to security problems in Africa and the Middle East. “Political violence could hit production or transit routes. Should Europe be reliant on these African gas producers, there is a potential risk that wholesale prices will rise,” said Amy Gibbs at political risk insurer Jardine Lloyd Thompson. These developments have prompted Britain’s energy regulator Ofgem to commission a report on future supply risks. “The decline in UK continental production has inevitably resulted in increased reliance on international gas markets. This exposes Great Britain to a range of additional risks,” Ofgem’s report said, adding this included conflict in Africa. Research shows that Europe will need to meet around 20 percent of its annual gas demand, equivalent to 125 bcm, from sources in Africa, many of which have yet to be developed. High production costs and a lack of expertise in many countries that are planning to export gas means that new supplies will be expensive and are likely to be delayed. Africa currently has around 85 bcm a year of gas available for export, a figure exploration companies say could rise to 130 bcm by 2020. This means that Europe will want almost all of Africa’s future gas exports, something analysts say is unlikely given Asian buyers pay more than Europe. Most of East Africa’s expected production of 40 bcm a year is already earmarked for Asian buyers.