News
'Forecast of 10 per cent rise in corporate earnings unrealistic'
European corporate earnings have proved largely resilient in the second quarter, but 2009 estimates are too rosy and have yet to reflect the slowing global economy.
Data from 219 of the DJ Stoxx 600 companies that have reported second-quarter results showed that 56 percent beat expectations, while 43 percent came in below forecasts, according to Thomson Reuters figures.
But earnings expectations have been coming down steadily, and with the euro zone economy contracting in April-June and the fast-growing Asian region showing signs of deceleration, further deterioration in the earnings environment looks inevitable.
Market strategists and fund managers said a consensus forecast of a 10 percent increase in 2009 European corporate earnings by was unrealistic, and consumer-related sectors would be the most at risk of a cut in estimates.
"Given the economic backdrop that we are seeing at the moment and the problems that are faced by companies, we would expect that to result in margin pressure. Therefore 10 percent earnings growth is unrealistic in 2009," said Stanley Pearson, head of European equities at Standard Life.
Consensus 2008 earnings growth for European companies from specific company analysts have fallen to 1.2 percent from around 10 percent in the beginning of the year.
Morgan Stanley strategists forecast a 14 percent fall in European corporate earnings this year, an improvement on its previous estimates of a 16 percent decline, but it was more pessimistic for 2009, when it expects earnings to fall 17 percent. "The next bull market won't start before earnings (reach a) trough, which we now believe is towards the end of 2009," the broker said in a note. The euro zone economy recorded its first-ever contraction in the second quarter, while Asia also faced slower growth, with Hong Kong's economy unexpectedly shrinking in April-June.
Global banking group HSBC said in its half-year earnings in earlier August that growth in Asia was threatened by a potential recession in the US and rising inflation, which could leave emerging markets holding up "reasonably well" but with "less momentum than in the recent past".
"The key sort of danger for the market is a bit of over-optimism for 2009 earnings, but the stock market is clearly not that optimistic when you look at the performance year-to-date," said James Buckley, a European fund manager at Baring Asset Management. "Investors are sceptical of earnings forecasts." However, Buckley said third-quarter results may turn out to be similar to the second quarter's, which he said "have not been stellar by any means, but they have certainly avoided the worst-case scenario".
According to UBS, software, healthcare and food retailers beat earnings estimates in the second quarter, while diversified financials, insurance and transport had the largest misses. "Q3 might actually be okay on the grounds that we have a couple of things acting in favour of European corporates," said Buckley, who has 1 billion euro of assets under management."The dollar has been strengthening, and that should give a boost to export earnings. Commodity prices, or input prices, have been coming down quite sharply. That should potentially help margins. I think Q3 may be another quarter that surprises by not being disastrous."
Buckley said 2009 earnings would depend on how the global macro environment played out, especially if growth in Asia and Latin America stayed robust. With the US and European economies sluggish, Stephen Pope, head of equity research at Cantor Fitzgerald Europe, said European equity investors would be best to stay with companies with higher emerging market exposure. (Reuters)
Data from 219 of the DJ Stoxx 600 companies that have reported second-quarter results showed that 56 percent beat expectations, while 43 percent came in below forecasts, according to Thomson Reuters figures.
But earnings expectations have been coming down steadily, and with the euro zone economy contracting in April-June and the fast-growing Asian region showing signs of deceleration, further deterioration in the earnings environment looks inevitable.
Market strategists and fund managers said a consensus forecast of a 10 percent increase in 2009 European corporate earnings by was unrealistic, and consumer-related sectors would be the most at risk of a cut in estimates.
"Given the economic backdrop that we are seeing at the moment and the problems that are faced by companies, we would expect that to result in margin pressure. Therefore 10 percent earnings growth is unrealistic in 2009," said Stanley Pearson, head of European equities at Standard Life.
Consensus 2008 earnings growth for European companies from specific company analysts have fallen to 1.2 percent from around 10 percent in the beginning of the year.
Morgan Stanley strategists forecast a 14 percent fall in European corporate earnings this year, an improvement on its previous estimates of a 16 percent decline, but it was more pessimistic for 2009, when it expects earnings to fall 17 percent. "The next bull market won't start before earnings (reach a) trough, which we now believe is towards the end of 2009," the broker said in a note. The euro zone economy recorded its first-ever contraction in the second quarter, while Asia also faced slower growth, with Hong Kong's economy unexpectedly shrinking in April-June.
Global banking group HSBC said in its half-year earnings in earlier August that growth in Asia was threatened by a potential recession in the US and rising inflation, which could leave emerging markets holding up "reasonably well" but with "less momentum than in the recent past".
"The key sort of danger for the market is a bit of over-optimism for 2009 earnings, but the stock market is clearly not that optimistic when you look at the performance year-to-date," said James Buckley, a European fund manager at Baring Asset Management. "Investors are sceptical of earnings forecasts." However, Buckley said third-quarter results may turn out to be similar to the second quarter's, which he said "have not been stellar by any means, but they have certainly avoided the worst-case scenario".
According to UBS, software, healthcare and food retailers beat earnings estimates in the second quarter, while diversified financials, insurance and transport had the largest misses. "Q3 might actually be okay on the grounds that we have a couple of things acting in favour of European corporates," said Buckley, who has 1 billion euro of assets under management."The dollar has been strengthening, and that should give a boost to export earnings. Commodity prices, or input prices, have been coming down quite sharply. That should potentially help margins. I think Q3 may be another quarter that surprises by not being disastrous."
Buckley said 2009 earnings would depend on how the global macro environment played out, especially if growth in Asia and Latin America stayed robust. With the US and European economies sluggish, Stephen Pope, head of equity research at Cantor Fitzgerald Europe, said European equity investors would be best to stay with companies with higher emerging market exposure. (Reuters)