European stock investors riding the region’s economic and profit momentum are betting the 2017 rally has further to run.
Company chiefs and money managers alike are shifting their focus from the perils posed by a stronger euro to the tailwinds from the economic rebound. Even as European equities trade near a 2015 high, investors have been increasing exposure this year on bets the region’s growth will ignite earnings. Analysts haven’t been this optimistic about the outlook for European profits in the coming year since 2011.
Even with sentiment that upbeat, JPMorgan Chase & Co. finds next year’s consensus estimates of 8.5 percent earnings growth conservative and projects double-digit increases. Lenders from UBS Group AG to Swedbank AB are among European companies expecting the economic recovery to strengthen, boosting profits. Orange SA said in October the French mobile market is improving “in a very significant way.” Europe’s biggest chemical maker, BASF SE, expects stepped-up economic activity to drive higher second-half earnings.
“The tone we’re hearing from company management is much, much stronger than it has been for a number of years,” Marcus Morris-Eyton, a London-based fund manager at Allianz Global Investors, whose team manages 17.5 billion euros ($20.4 billion), said by phone. “Europe is clearly riding the wave of cyclical recovery.”
Analysts’ 12-month outlook for European equities’ earnings has been rising since mid-2016 and is now the highest since September 2011. The Stoxx Europe 600 Index is up 9.4 percent this year, compared with a 15 percent increase in the S&P 500.
About 66 percent of the region’s companies have reported third-quarter results so far, with 55 percent of Stoxx 600 members beating expectations. Sectors with positive surprises include oil and gas, telecommunications, financials and technology. It’s the first year since at least 2010 that euro-area earnings haven’t been downgraded, according to JPMorgan.
In contrast, sales have seen a small miss, with 54 percent of the companies reporting a negative revenue surprise. However, investors should be less concerned by this, given the positive broader sentiment, according to Brian Jacobsen of Wells Fargo Funds Management.
After years of weakness that boosted the region’s exporters amid unprecedented monetary stimulus, the euro is 2017’s top performer among G-10 currencies. While some investors have been spooked by the potential harm this could hold for exporters, it’s the improving political backdrop and “strong” cyclical data that’s bolstering the euro, and that’s good for stocks, said Allianz’s Morris-Eyton.
Credit Suisse Too
“Considering the broader economic sentiment is positive, I can understand why stocks would be rising even with lackluster revenue growth,” Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Wisconsin, said by email. “Strong growth can overcome a strong currency any day.”
Credit Suisse Group AG was among the latest major companies this week to laud the positive trading conditions. “We expect global economic growth to remain strong overall in the fourth quarter, which could be a significant tailwind for our activities,” the bank said as it reported earnings Thursday.
Still, Max Kettner of Commerzbank AG, cautions against forgetting about the risks from a stronger euro and sees room for earnings disappointment in the future if the currency continues to rise.
“From current levels, we definitely do need to see some depreciation from the euro, otherwise the reporting seasons in 2018 have the potential to be quite dismal,” Kettner, a London-based cross-asset strategist at Commerzbank, said by email. “If the euro were to strengthen to 1.20 against the dollar and trade through it, that’s the time to take profit on European stocks.”
European Central Bank President Mario Draghi cited the region’s “increasingly robust and broad-based economic expansion” at the institution’s October meeting, as he put the ECB’s signature stimulus measures on the road to a gradual exit.
Euro-area economic confidence surged to its highest in almost 17 years in October. The unemployment rate inched lower in September as the economy expanded for an 18th consecutive quarter.
“We believe this backdrop to be quite favorable for sustained improvement in corporate spending,” Prabhav Bhadani, an equities strategist at JPMorgan, said by email. “Overall, this should manifest into strong earnings delivery for the region in the near future.”