In the last few years, companies with significant exposure to the Eurozone, such as Vodafone (LSE: VOD) (NASDAQO: VOD.US), have been punished by investors as a result of the region’s poor economic performance. That’s understandable, since while the UK, US and most of the rest of the world have come through the financial crisis and have started to deliver strong growth, Europe is still on the cusp of a recession. In fact, it could be argued that the region has never really emerged from the financial crisis.
However, having an exposure to Europe could become a major asset, rather than a liability, for companies such as Vodafone. Here’s why its shares could soar as a result.
Running Out Of Options
To be blunt, the Eurozone is quickly running out of options. It is now experiencing perhaps policymakers’ biggest fear — deflation — and this can cause dire consequences for the economy. One of these is a reduction in consumer spending, since consumers simply put off spending because the price of the goods or services they desire will become cheaper. And, with reduced consumer spending, a prolonged recession is not far away, since a crisis of confidence can take many years to overcome.
Faced with this situation, the Eurozone seemingly has little choice but to follow its US, UK and Japanese counterparts and unleash a significant quantitative easing (QE) programme. If this is undertaken, it could cause a short term boost in the price of companies that trade in Europe, such as Vodafone, and also improve the company’s long term profitability outlook, too.
Competitive Position
Of course, Vodafone remains a major mobile operator in Europe and, should growth return to the region, investor sentiment is likely to improve to a significant degree, as the market realises how strong Vodafone’s competitive position is. For example, barriers to entry are extremely high in the mobile industry and, although data roaming charges have been cut by regulators, Vodafone has diversified into other areas, notably via the acquisitions of Kabel Deutschland and Spain’s Ono. Such moves have thus far not been welcomed emphatically by the market, but an improving Eurozone could cause those buys to seem like excellent acquisitions at relatively low prices.
Looking Ahead
With such an entrenched position in the Eurozone, Vodafone’s future prospects are clearly tied to the region. However, with the potential for much stronger economic performance, coupled with Vodafone adopting a strategy of focusing on increasing its presence in the region in recent years, any improvement in the Eurozone’s outlook would undoubtedly be good news for the company. And, with Vodafone still offering good value for money as evidenced by a dividend yield of 4.9%, it could be worth buying ahead of potentially brighter times for the Eurozone.
