LONDON — Europe’s brands large and small need to prepare themselves for a financial crisis that could see global equities lose up to 35 percent of their value, according to financial experts.
According to a report this week by Deutsche Bank, world stocks could lose more than a third of their value, if Europe’s widening sovereign debt problems deteriorate into a full-blown financial crisis similar to the one that followed Lehman Brothers collapse in 2008.
The Deutsche Bank report, penned by analyst Francesco Curto, said the most vulnerable companies are in the industrial, telecom and consumer discretionary sectors. In a milder scenario, where the crisis is contained, world stocks would fall by around 12 percent, the report said.
“Markets are increasingly concerned about the lack of unity among European politicians in the face of the worsening sovereign debt crisis in the euro zone,” Curto said.
“The failure of the various measures taken so far to build confidence among investors has already pushed up the equity risk premium, on our calculations.” High-risk investments have higher premiums.
He said that “prompt action” from European authorities could avert the worst-case outcome, which would mean no economic recovery before 2015. But even Deutsche Bank’s mild scenario is foreboding: “The downside risks to our relatively mild scenario have undoubtedly increased recently,” Curto said.
Reuters, meanwhile, in its quarterly survey of more than 350 economists worldwide, said Europe’s G7 countries — with the exception of Germany — will grow by less than 2 percent this year. The report said economists were also concerned about the impact of fiscal austerity measures on European economies’ growth.
Europe’s economists are not alone in their concerns. Nick Hood, head of external affairs at Company Watch, the London-based firm that tracks the financial health of corporations, told WWD the outlook for retailers, especially the more mass ones, in the cash-strapped euro zone is bleak.
“Consumers in the struggling economies — like Ireland, Portugal and Greece — are looking at up to double-digit drops in their living standards, and when that happens they put their wallets away or just cut up their credit cards,” he said.
“The risk profile of many retailers and brands is fragile already, which means the situation could turn into a retail nightmare. It also means that if people are spending, they’re looking for bargains — and that means pressure on companies’ profit margins.”
Hood said luxury firms on the whole were more insulated because there are always going to be people with money to spend, because there is a “loyalty factor” among customers, and because the bigger brands are exposed to growing emerging markets such as China.