Daily Management Review

UBS Strategist Say European Earnings May Be At Inflection Point


11/07/2016




UBS Strategist Say European Earnings May Be At Inflection Point
According to the Head of European Equity Strategy at UBS, there is hope Europe’s companies hit an inflection point during this year's third quarter after almost six years of no earnings growth for the region.
 
Nick Nelson says the recovery seen in revenue growth is key to driving positive momentum in earnings with over half of European companies having already reported.
 
"Revenues have had the best net beats for five quarters…this is critical because we've had no earnings growth in Europe for six years and the last year and a half we've had no topline growth. And it's been very hard for companies to generate EPS (earnings per share) growth with no topline growth."
 
"To see that starting to improve, it's just a glimmer but it seems we may be at an inflection point there," he continued.
 
According to UBS, the highest amount of net beats so far in the third quarter was enjoyed by pharmaceutical, auto and banks stocks on a sector basis. Food and beverage and tobacco stocks are those struggling along with the most misses and a result which matches the broader deterioration in earnings momentum experienced by food producers.
 
Analysts at UBS say that in terms of earnings momentum during the most recent quarter cyclical stocks have outperformed defensives when the market is sliced up in a different way.
 
With Nelson pointing out that year after year of expectations for 8 – 15 percent EPS growth have been met by flatlining reported numbers for nearly the past six years, consensus has been overly optimistic for a long time.
 
However, driven by strength in certain financials and energy stocks, this year, the lower end of such a forecast range may be achievable going forward, feels the UBS strategist.
 
Looking ahead to 2017, Nelson says, "We think there's a bit of topline growth that comes through, there's a little bit of operational leverage, you have got some base effect obviously from oil. In Q1, oil will be up dramatically - maybe the banks as well - and both of those will get you to around 8 (percent EPS growth) but we struggle to get to the mid-teens, we think that's too high."
 
And this level of accomplishment should be enough to give markets a welcome boost.
 
"The market would cheer an 8 percent growth rate, that would be good enough," he added.
 
A comparison of downgrade and upgrade trajectories during the third quarter is one reason for the UBS team leader's optimism. Lowering expectations ahead of announcements and thereby diluting the credibility of any positive surprises that come through, previous years have often seen a raft of earnings' forecast downgrades during the quarter.
 
These beats may be more credible than usual, is suggested by the fact that August actually saw net upgrades while September and October saw a more or less equal number of upgrades and downgrades, Nelson says.
 
"That's another positive sign when we look at the data," he posited.
 
(Source:www.cnbc.com)






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