Forecasts for European profits growth at 7-year low
Growth forecasts for European corporate profits have plunged to the lowest level since the financial crisis as the region languishes in an earnings recession.
Some investors warn the disappointments will continue, holding back Europe’s equity markets and undermining confidence.
Consensus forecasts for earnings per share growth among European companies have dropped to 0.5 per cent for 2016 — the lowest level since the first quarter of 2009, says UBS.
This follows two successive quarters of negative earnings growth, according to Bloomberg data. Earnings fell 39 per cent year on year in the third quarter of 2015 and dropped 71 per cent in the fourth quarter, according to data from the Bloomberg European 500 Index.
Analysts’ forecasts on earnings have also been consistently too optimistic, leading to big disappointments. This has not helped the equity markets, with European stocks down 10 per cent since the start of the year.
Matthew Beesley, head of global equities at Henderson Global Investors, said: “The earnings outlook is very gloomy. I can’t see where the upside is coming from because there is no engine for growth in the world.”
Mr Beesley adds that companies have cut costs to the bone, with little room for further reductions, which will make it harder to deliver profits. At the same time, sales and revenues are suffering from weak global demand.
There are also political headwinds in Europe, with some investors worried about the potential destabilising impact from the UK’s Brexit vote and the political stalemate in Spain.
Net positive surprises on earnings per share fell to 2 per cent in the fourth quarter of 2015 — one of the lowest levels since the numbers were first compiled seven years ago, according to UBS, which tracked more than 500 of Europe’s biggest companies. Net positive surprises are positive surprises minus negative surprises on earnings forecasts.
However, some investors and analysts say Europe may be at a turning point, with the earnings recession likely to end in the current second quarter or the next.
Nick Nelson, head of European equity strategy at UBS, said: “We may be past the worst. This could be the bottom on the earnings front, assuming commodity prices continue to rise and the macro backdrop improves.”
John Stopford, co-head of multi-assets at Investec Asset Management, said: “We think we have hit the lows on earnings. We expect to see some earnings growth, helped by the rise in the oil price and stabilising commodities.”
Some investors are also positive on Europe because they think an accommodative European Central Bank, which is expected by some to ease monetary policy further, will boost demand for goods and services.
Companies may also benefit from low cost pressures, with subdued inflation, historically low bond yields and constrained labour costs helping to lift the profit bottom line.