London: European companies with big sales in the US are already suffering from the threat of a protracted political standoff over the US budget, with analysts cutting earnings forecasts and shares underperforming.

Data compiled by Reuters on Friday shows that a basket of shares of firms in the Stoxx 600 Europe index which make at least half their sales to North America had lost 2.7 per cent in 14 days. Those with most of their sales in Europe have slipped 1 per cent. The index overall fell 1.7 per cent.

The partial US government shutdown and wrangling over the federal debt is driving investor money from the US to Europe. But some European companies, notably in pharmaceuticals, capital goods and the construction sector, face pain rather than gain from the Washington standoff.

These include British-listed defence groups BAE Systems and Cobham, drugs firm BTG and German construction company Heidelbergcement, which rely on US government contracts for between 20-40 per cent of their revenues, according to Credit Suisse estimates. BAE sells military hardware and other products and services to the US government, accounting for 40 per cent of its revenues last year.

In the past week, BAE shares have dropped 3.3 per cent, against a 0.9 per cent fall on the FTSE 100.

US exposure has helped some European companies outperform local peers as Europe’s own economic growth has lagged. Analysts now see a reversal in the cheaper valuations for Europe-focused firms, which now stand to gain as the growth outlook for Europe improves and Washington generates uncertainty for business.

“Companies that sell to the US government are going to be more directly affected, but even companies that sell to the US generally,” Dan McCormack, a strategist at Macquarie, said. “There is a risk of a slowdown of economic activity at least for a couple of months, given the shock to confidence that this is going to entail, so all those guys should be getting hurt.”

Infrastructure projects

Of those companies in the Stoxx 600 Europe index that make at least 50 per cent of their sales in North America, those hardest hit by cuts in analysts’ earnings forecasts were building material provider CRH and carmaker Daimler. Their profit expectations were cut by 4.2 and 5.9 per cent, respectively, StarMine data showed.

CRH, whose shares have dropped 2.7 per cent in the past week, has a major US business in providing materials for infrastructure projects — it is the biggest producer of asphalt, for example — and so is exposed to the public sector. Daimler is less directly affected by government spending, although it does sell trucks to federal agencies as well as school buses.

“Historical analysis suggests if the shutdown lasts longer than 10 days it begins to negatively impact equity markets,” said James Butterfill, global equity strategist at Coutts. “It also tends to hit corporate confidence, leading to delays in capital expenditure plans.”

A selloff in European companies with US exposure may also be exacerbated by profit-taking as these stocks have outpaced the broader index and Europe-focused firms since the start of the year — a trend that a European recovery has been reversing.

European companies which earn at least half of their revenues in the US trade, on average, on 15.3 times their expected earnings for this year, against 14.2 times for the Stoxx 600 as a whole.

Other European firms, could go on outperforming their US peers, as they did in the four weeks before and after the previous debt ceiling deadline at the end of 2012.

“In an environment of flattish to slightly up US markets, Europe can outperform because there are significantly cheaper valuations and the growth dynamics are more supportive as well,” Emmanuel Cau, a strategist at JP Morgan, said.