U.S. Treasury Secretary Timothy Geithner met yesterday with two important players in the European debt situation – German Finance Minister Wolfgang Schaeuble and European Central Bank (ECB) President Mario Draghi. After the meetings, the three made public statements seeming to indicate that the U.S. and European financial leaders would take coordinated efforts to address certain European countries’ debt situation (Spain, Italy). Judging from the statements, the U.S. government’s perspective is one of boosting European demand because of the demand side effects further European slowing could have on U.S. economic growth. On the opposite end of the pond, depending upon what country you’re from, the issue is one of default prevention, recession avoidance, or fiscal prudency. All leaders appeared interested in gradual adjustment of the weak countries’ balance sheets rather than taking a “just take the pain now and get it over with” approach. In applying this to markets, investors probably have priced into the market the most likely outcome of this week’s meetings – ECB easing and neutral Federal Reserve action. Of course, this outcome is only one of nine potential end-of-the-week outcomes, as is shown in the matrix below. Other potential outcomes include both central banks indicating further easing, which could send the market lower or higher depending upon investor interpretation of the actions and statements; another potential outcome is the ECB being unable to produce agreement on further easing, such as buying long term Spanish and Italian debt, and the U.S. acting in favor of further easing, with such an outcome probably sending European stocks lower and American stocks higher.
With this background in mind, it begs the question: in relation to other companies, which companies are winners because of central bankers’ actions and which companies are losers? The issue isn’t trivial because of the multi-dimensional factors that could influence a company’s balance sheet. For instance, Apple Inc. (NASDAQ:AAPL) has a large cash balance and would certainly gain more interest income, but would a gain in interest income offset potential declines in retail sales associated with a possible European debt crisis?
In considering only Spanish and Italian companies, of the nine largest Spanish companies big enough to be included in the S&P 500, the biggest losers are Banco Santander, S.A. (MCE:SAN) (NYSE:SAN) a (multinational bank), Banco Bilbao Vizcaya Argentaria S.A. (MCE:BBVA) (NYSE:BBVA) (multinational bank), Mapfre Group (insurance), and Grupo ACS (civil and engineering construction). Some of the biggest Spanish winners include Telefonica S.A (NYSE:TEF) (MCE:TEF) (telecommunications), Repsol SA (MCE:REP) (oil and gas), Iderdrola (wind energy), CEPSA (energy), and Gas Natural Fenosa (natural gas).
Of the Italian companies big enough to be included in the S&P 500, the biggest losers include Assicurazioni Generali SpA (PINK:ARZGY) (BIT:G) (insurance), Fiat Industrial SpA (BIT:FI) (BIT:FIP) (motor vehicles and parts), UniCredit SpA (BIT:UCG) (BIT:UCGR) (banking), San Paolo IMI (banking), Poste Italiane (package delivery), Intesa Sanpaolo SpA (BIT:ISP) (BIT ISPR) (banking), and Finmeccanica SpA (BIT:FNC) (aerospace and defense). Some of the biggest Italian winners include Enersis S.A. (NYSE:ENI) (energy), Enel S.p.A. (BIT:ENEL) (utilities), and Telecom Italia S.p.A. (BIT:TITR) (BIT:TIT) (telecommunications).
Of course, because of the many assumptions behind the results and the multi-faceted manner in which the debt situation could play out, some winners could switch to being losers, and, in very limited circumstances, some losers could switch to being winners.
In all, the European debt situation is probably not a situation in which a declining tide lowers all boats – there are winners and losers in all this, albeit that there are probably more losers than winners.
