These are the Stocks to Buy—and Avoid—as the Euro Rallies

ith the euro breaking through multiyear highs recently, it is time for investors to shake-up their European stock portfolio, according to Société Générale.

In a note out on Thursday, strategists at the French bank said the correlation between a stronger shared currency EURUSD  and a weaker stock market has strengthened since mid-May, leading to weakness for the region’s Euro Stoxx Index SXXE A rising currency tends to be a headwind to multinational companies selling goods and services outside of Europe.

Since it is May peak, the benchmark is down 4.5%, while the euro has tacked on about 8% against the dollar to around $1.18 at its best levels, trading close to a 2½-year high.

To be sure, the eurozone currency has pulled back a touch against the buck in recent trade, but is still at lofty levels.

But that doesn’t mean investors should leave the region altogether. For the savvy trader there are still rich returns to be banked, if you just know where to look, SocGen wrote.

Stocks to buy

“To protect a portfolio during a period of [euro] strengthening, favour domestic names,” the strategists said.

That means buying into companies that generate most of their sales in the eurozone, which isolates them from any currency swings. That includes companies such as Aeroports de Paris ADP,  Italgas IG, Deutsche Wohnen DWNI,  SFR SFR, Telecom Italia TIT,  and Bankinter BKT, that all generate 100% of their sales within the eurozone.

Also on Société Générale’s list are Intesa Sanpaolo ISP,  Royal KPN KPN,  Galp Energia GALP,  and Fraport FRA,  that make between 99% and 80% of their revenue from countries in the currency union.

Another way to avoid the headwind of a rising euro is to tap into consumer names. The idea is that such companies benefit from the rising consumer confidence that tends to improve along with a brighter economic outlook. SocGen’s Eurozone Consumer basket, which is made up of 17 consumer stocks with strong sales to the region, has risen about 5% since mid-May, easily outperforming the Stoxx 600’s 2% loss.

“This is not a surprise, as our basket is tilted towards eurozone consumers, who would actually benefit from a stronger euro thanks to higher purchasing power,” they said.

Among companies in the basket with highest eurozone exposure are Mediaset MS, Dia DIA,  Zalando ZAL, Carrefour CA, Ryanair RY4C, and Peugeot UG.

Société Générale

Stocks to avoid

On the other hand, there are also stocks that are best to avoid as the euro continues its ascent.

“We look for European exporters that have performed well in the recent period despite the strengthening of the euro, which means the market may not have fully priced in the [currency] impact, leaving them at risk of disappointment in the coming earnings seasons,” the strategists said.

That means these companies that make most of their money outside the eurozone could be punished, when investors start to price in the foreign-exchange impact: ASML Holding ASML,  Fiat Chrysler Automobiles FCA,  Nokia NOKIA, Adidas ADS,  Unilever ULVR,  UL,  Christian Dior CDI,  and Koninklijke Philips PHIA, to name a few.

Article and media originally published by Sara Sjolin at marketwatch.com