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Big earnings misses, IPO pain and US election turns buyside defensive towards year-end – ECM Pulse EMEA – Analysis

  • ASML,Nestle and LVMH results prompt fears of wider economic slowdown
  • IPO disappointments dent buyside confidence
  • Investors likely to “sit on hands” until after US election

European equity investors were hit with an autumn chill last week, after several of Europe’s best loved equity darlings posted poor earnings numbers, hurting the mood of an investor base already dealing with recent IPO disappointment and nerves about the impending US election.

Investors look at ECM investing through the prism of downside vs upside risk. The question is always whether the risk of missing out on alpha-generating returns, outweighs the risk of losing.

For most of this year, the upside risk has been the greater, although investors have maintained discipline, but these new risk factors are beginning to shift some buysiders towards protecting their returns for this year, rather than seeking out new opportunities. It is hoped that any market turmoil will be short, given a large pipeline being lined up for 2025.

However, a bearish triangle of slower growth, political fears and bad feeling from the IPO market could hinder activity into the end of the year, particularly for high-risk trades, like new listings.

Semiconductor firm ASML [AMS:ASML), food giant Nestle [SWX:NESN] and luxury conglomerate LVMH [EPA: MC] all posted disappointing numbers in quarterly earnings last week.

Lower growth expectations from three corporate giants across a high-growth technology sector, like semiconductors, consumer staples and luxury goods, gives rise to concern of a wider economic slowdown.

Dutch-listed ASML was one of the worst weekly performers in the Stoxx 600 as of Friday October 18, down around 15%, LVMH was also down over 3% for the week as part of a wider luxury sell-off prompted by its results.

Nestle’s share price was not adversely hit – it was slightly up for the week, as investors bought into new CEO Laurent Freixe’s restructuring plan –  but analysts covering the stock were shocked by the organic growth outlook of 2% for 2024, which is reportedly the lowest for Nestle in over 20 years.

“This is a serious headwind for the market heading into next year,” said an ECM investor at a large asset manager. “These companies that are reporting missed earnings, and the stocks trading down across Europe, are some of the biggest consensus longs in everyone’s portfolio.”

An ECM banker reflecting on the week noted that it had been “a shocker” for European long-only exposures and noted that several investors he had spoken to were now firmly on the defensive.

International hedge fund flows into Europe are also faltering, reversing a trend from earlier this year with several US funds seeking exposure in European equities, and European ECM, now scaling back their activity.

The banker noted that his institutions data showed hedge fund investment in European equities down had fallen significantly since the summer.

IPO window closes?

European growth fears have come at a difficult time for investors, particularly capital markets desks, given an autumn IPO window that is turning lacklustre. Of the four significant new listings launched this window only BC-Partners backed German academic publisher Springer Nature [ETR:SPG] has been priced and traded up.

While its shares are up around 7% in the aftermarket, the USD 1.6bn listing of CVC-owned Polish retailer Zabka Group [WSE:ZAB] was less successful, with a first bounce of 9% erased in two days of trading and the stock falling below its IPO price on its second day of trading.

Zabka trading down follows the postponement of Spanish baker Europastry last week. These two recent disappointments at a time of low volumes, combined with the underperformance of other European IPOs from earlier this year, such as Spanish luxury conglomerate Puig [BME:PUIG] has driven Dealogic’s IPO Health index to its lowest point so far this year, eradicating some of the positivity from a strong 1H.

A graph showing the growth of the stock market

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The European IPO market is far from broken, and in terms of volumes it has been a year of recovery from a poor 2023, but late-year disappointments will smart after 2024 began with a spurt of optimism.

A second ECM investor noted that, while he never put pens down, the performance of Zabka had hurt buyside sentiment.

“Liquidity is terrible in new IPOs, so it doesn’t take selling by that many accounts for the stock to fall below issue price,” he said but added that IPO performance combined with economic issues probably meant the European IPO window for 2024 was now closed.

There were not that many candidates left to come to market this year, but this news service reported last week that Blackstone had been keeping options open to launch the IPO of Spanish gaming company Cirsa before year-end if markets traded up after the US election.

Trump trade

The final side of Europe’s bearish triangle rests on the US presidential election which is poised on a knife edge according to recent polls.

As former president Donald Trump has clawed back some of the small polling gap between him and Vice President Kamala Harris, and taken the lead in the odds market, some investors have attempted to trade around the possibility of a Trump victory, which could bring tariffs in its wake.

The ECM banker noted that this has led to US bank equity gaining some traction, as investors look to possible financial deregulation, defence stocks have also benefitted he added.

German contractor Renk [ETR:R3NK], for example, is up 6% in the last five days, just 8% below the EUR 21 a share level where Sponsor Triton sold a stake on October 2. The share price is still around 30% above the IPO price.

Should Trump be victorious in the vote, and defence stocks rise further, Triton could play on that momentum when the lock-up expires on December 3.

But outside of a small basket of Trump beneficiary stocks, European equity and ECM investors are struggling with how to trade the return of the 45th president, especially given his pledge of universal tariffs on all imports into the US and even higher tariffs for goods made in China.

“In Europe we almost seem more concerned with Trump than they are in the US,” said a third ECM investor. “But there isn’t an obvious way to price in these tariffs and given that the election is essentially a 50/50, most of us are probably going to sit on our hands a little.”

The ECM banker confirmed that Trump’s tariff talk made some of the fears about European economic growth, which have surfaced from this earnings season, more pronounced.

With downsize risks starting to outweigh the fear of missing out (FOMO) on a hot trade, sponsors and other equity sellers must be cognisant of investor nerves when bringing trades to equity capital markets. IPO sellers might also be better to turn to 2025.

by Sam Kerr