China Slowdown Fears to Weigh on Europe’s Earnings Season

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Analysts flagged China's slowdown as a key risk to second quarter earnings season in Europe, as markets await numbers from U.S. bellweather Alcoa.

"We have however already started to see the usual pre-earnings lowering of expectations and this can artificially inflate earnings," Joshua Raymond, a chief market strategist at City Index, told CNBC.

On Monday, the Shanghai Composite fell 2.4 percent on the news that Beijing will no longer extend credit to sectors struggling with overcapacity. Markets – and corporate earnings – remain vulnerable to liquidity drying up in China, particularly at a time when the U.S. looks set to start unwinding its monetary stimulus program. The Shanghai Composite is currently down 13 percent year-to-date.

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Commodity producers are particularly at risk from a slowdown in the world's second biggest economy, especially given the recent fall in commodity prices. "It would not be a surprise to see mining companies announce new, or extending, cost-cutting measures to help support contracting margins," said Raymond. He added that investors should steer clear of companies with heavy exposure to China.

Ishaq Siddiqi a market strategist at ETX Capital, said miners such as Anglo American, Rio Tinto and BHP Billiton could suffer greatly as a results of China's slowdown, which would smack production and raise capital expenditure.

(Read More: China Stocks Sink 2.4% on Growth Concerns)

However, he added that European companies exposed to the U.S. could post healthy earnings as the world's largest economy recovers.

"We know that QE [quantitative easing] is on its way out, so the market will now have to switch back to old habits, and focus on fundamentals of companies rather than the liquidity injections," Siddiqi told CNBC.

He said that European companies likely to gain from exposure to the U.S. included, "Autos like Volkswagen, BMW and Audi, who have all reported bumper sales figures in the U.S., together with construction companies like Wolseley in the U.K., with big operations in the U.S., and Lafarge. Transport and logistics companies, like Deutsche Post, who owns DHL, as well as telecom companies like Deutsche Telecom, who owns T-Mobile in the U.S. Or Vodafone in the U.K., who has that sexy Verizon wireless stake."

(Read More: Goldman Sachs Sees More Easing in Europe and UK)

The same view was shared by Anko Beldsnijder, the senior portfolio manager at MainFirst Bank, who said he was more inclined to seek companies with U.S. exposure, than those exposed to the European periphery.

"In this economic environment with modest growth but abundant liquidity, investors will award stocks that are not only defensive, but can show positive earnings expectation profiles."Beldsnijder told CNBC.He added that he was keen on under-valued Europe-centric companies, especially banks, media companies and low-cost airlines.

Nick Xanders, head of European equity strategy at BTIG, added that he was interested in French car maker Renault, as a way to gain exposure to ultra-loose monetary policy in Japan.

"You look at Japan, they're basically the QE junkies homeland right now… in Europe there is very few ways to play it, one of them being Renault," Xanders told CNBC on Monday. "Because it has got the Nissan stake, the exposure there, the weakening currency will help them."

Ishaq Sidiqqi at ETXCapital has no personal holdings in the above stocks, but ETX Capital's clientsmay have some holdings. Nick Xanders and BTIG have no holdings in Renualtshares.