European earnings revision trend worsens….
The 3-month European EPS Revision Ratio (ERR) fell to 0.77 (77 stocks upgraded per
100 downgraded) from 0.86 last month, remaining near the long-run average. This has
been driven by worsening sentiment towards EM-exposed stocks, and downgrades
following from EM FX devaluation (Chart 2). In contrast, ERR trends for domesticoriented
stocks continue to improve on a relative basis, again highlighting the
decoupling of European ‘Recovery’ from the global slowdown. Equity market
performance is recoupling with ERR trends (cover chart), indicating the recent
downgrades are likely priced in.
Winners and losers on EPS revisions
Following earnings revisions has, in the long-run, generated superior returns. In the past
three years, stocks with the strongest ERR have outperformed by 16%, while those
with the weakest ERR have underperformed by 30% (page 18). The current macro
backdrop should continue to favour momentum strategies. Top stocks on ERR are
Vestas, KBC, Daimler, Prosieben, and Deutsche Boerse.
Expecting more upgrades on European macro
Our Composite Macro Indicator (CMI) improved last month, with not a single input down.
As a result, the Style Cycle stays in ‘Recovery’. The combination of macro improvement
and base money supply growth should enable the European ERR to rally. The current level
of ERR is consistent with an EPS Beats ratio of 50%; an improving ERR can be a catalyst
as the market waits for further ECB easing or stability in EM growth and FX.