Daily Management Review

As Earnings Beats Hit 7-Year High, Europe Stocks Look To Dethrone US Counterparts


05/09/2017




As Earnings Beats Hit 7-Year High, Europe Stocks Look To Dethrone US Counterparts
In this current earnings quarter, European firms have found that the number of positive surprises for them is turning out to be the best in seven years, says the Swiss bank UBS.
 
While only 29 percent missed, analyst estimates were comprehensively beaten by 63 percent of European companies that have reported financial results as of Monday morning.
 
Firms are now seeing revenue growth and better profits should follow, said Nick Nelson, head of European equity strategy at UBS.
 
"The macro (-economic outlook) in Europe is improving and top line growth is finally arriving and allowing firms some operational flexibility," he said.
 
"Profit margins are still depressed, so there is still headroom for profits to improve further in Europe."
 
Clearly underscoring a drumbeat of punchy euro zone data, the German DAX index has outperformed the Dow Jones industrial average, since the start of March.
 
But given the long-term stagnation, cynicism will remain over Europe's prospects, Nelson warned. And in order to back the call that European shares are good value, investors will need at least one more set of earnings results, he said.
 
So far, financials, pharma, energy, capital goods and autos sectors have proven to be the best "beats" on earnings, UBS noted. The Netherlands and the U.K. held the most number of beats among the major countries where more than 25 percent of the market had reported, the bank added.
 
Meanwhile, European stocks are finally catching the U.S. for earnings growth, Bruno Verstraete, a partner at Lakefield Partners, said on Tuesday, May 9, 2017
 
"Finally and almost two years after some have been calling European equity 'overweight', the hope of earnings growth acceleration seems to happen," he said.
 
"It is still early on, but with reduced geopolitical risks the consumer and companies might start to put cash at work and bring earnings and sales growth into a positive spiral," he said.
 
A rotation from U.S. equities could continue as European valuations seem attractive at the present at the current rate of earnings expansion, Verstraete stated. However, as factors such as Brexit, commodity prices and interest rates all come in to play, investors will need to employ some strategy, he does however note.
 
And backing the call that European stocks promise more upside than their American equivalents is Alexander Gunz of Heptagon Capital. "This has been one of the strongest earnings seasons in Europe for some time," he said.
 
"Results have mostly surprised on the upside. Looking ahead we see good reasons for further strength, aided by a combination of improving macro trends and operating leverage at a corporate level."
 
"In general terms, European equity valuations also continue to look attractive, particularly relative to the US", he said on Tuesday.
 
(Source:www.cnbc.com






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