Most and Least Vulnerable Stocks in European Market: HSBC Analysis

Analysts at British bank HSBC have identified the most and least vulnerable stocks in the current European market, which is burdened by a surge in corporate lending rates. The bank’s economists anticipate that the majority of the interest rate pressures will manifest over the next eighteen months given that most corporate borrowing holds floating rates. The average cost of debt for publicly listed companies in Europe has already risen from 0.42% in 2020 to over 3.7% presently. Furthermore, leverage, measured by net debt to EBITDA, is starting to increase again, while interest cover has witnessed a significant decline since the start of this year.

HSBC’s analysis focuses on two categories: cash-rich companies and high leverage names. The “cash-rich” companies are considered relatively immune to rising borrowing rates due to their net cash positions or negative net debt. These companies have outperformed the broader market since late last year. Examples of such companies include French luxury goods label Hermes International, British food processing company Associated British Foods, and Swiss biotech player Bachem Holding, among others.

On the other hand, HSBC also examined companies with high leverage, indicating high net debt to equity and net debt to EBITDA ratios. These companies possess debt maturity greater than 25% for this year and the following year. High debt levels make these companies susceptible to further interest rate increases. Stocks that emerged from this screening process, albeit with moderate underperformance compared to the regional equity benchmark, include German commercial vehicle manufacturer Daimler Truck Holding, Italian energy infrastructure player Snam, British tobacco manufacturer Imperial Brands, and German luxury and commercial automotive player Mercedes-Benz Group.

It is worth noting that CNBC’s Michael Bloom contributed to this report.