By Lucy Raitano and Samuel Indyk
LONDON (Reuters) – Europe’s third-quarter earnings have principally topped markets’ low expectations and buyers are rewarding beats extra handsomely than they’ve in years, regardless that weak China demand is a trigger for warning.
Within the two months previous to the beginning of Europe’s earnings season, analysts reduce their estimates for earnings development by round 380 foundation factors, knowledge from LSEG I/B/E/S confirmed, giving a decrease bar for firms to beat expectations.
Analysts typically trim their development forecasts simply earlier than earnings season kicks off, however normally by solely about 100 bps.
Up to now this season, with round 50% of the having reported outcomes, some 56% of firms have crushed expectations, in line with Citi fairness strategists, broadly according to a median quarter.
Because the U.S. heads to the polls on Tuesday, uncertainty stemming from the election would possibly hold buying and selling in European shares unstable for a while.
We take a look at 5 classes from Europe’s Q3 earnings season to this point.
EARNINGS BEATS REWARDED
In a reversal from earlier quarters, firms beating expectations have largely been rewarded by buyers greater than those who have missed forecast have been punished.
Evaluation by Financial institution of America World Analysis discovered shares beating expectations beat the market by 1.8% on common on the day they introduced earnings, the second strongest in a decade, whereas firms lacking EPS underperformed by 0.8%, largely according to historic averages.
“Concerns on Q3 earnings in Europe had been ramped up ahead of Q3 reporting,” mentioned BofA fairness strategist Andreas Bruckner.
“These concerns appear to have been overblown, with earnings recording a nice positive surprise, which also shows in: companies beating on EPS being nicely rewarded with outperformance; and consensus EPS for Q3 being revised up by 3% in recent weeks.”
CHINA WEAKNESS HITS CYCLICALS
Regardless of beats being largely rewarded, the influence of China’s flagging economic system has reverberated amongst Europe’s cyclical shares, with warnings of decrease demand from the world’s second largest economic system chopping throughout sectors.
“The earnings trends we are currently seeing are negative everywhere, there are sizeable earnings revisions and the breadth series has fallen across all regions, but it’s far worse in Europe than elsewhere, some of that has been in Chinese-related sectors like autos,” mentioned Graham Secker, head of fairness technique at Pictet Wealth Administration.
Luxurious bellwether LVMH, automakers Mercedes-Benz (OTC:) and Volkswagen (ETR:) and vitality firm BP (NYSE:) all warned China’s sluggish exercise was impacting outcomes.
CHINA STIMULUS OFFERS GLIMMER OF HOPE
Regardless of the doom and gloom – and really actual influence on Q3 figures – there stays some optimism for a restoration in China demand given the aggressive stimulus measures introduced in September by Chinese language authorities to bolster its economic system, in addition to the potential of extra to return.
Bernie Ahkong, CIO World Multi-Technique Alpha at hedge fund UBS O’Connor, mentioned that it’s not an enormous shock that firms are nonetheless downbeat about near-term demand from China, however added European shares are reacting way more positively on earnings relative to precise financials and outlook.
“…investors are looking through this somewhat given stimulus measures, and we are also seeing short covering and de-risking from hedge funds into U.S. elections,” mentioned Ahkong.
Different buyers, in the meantime, mentioned they need laborious proof that Chinese language stimulus is trickling by way of to the actual economic system and firm steadiness sheets.
BANKS RIDING INTEREST RATE WAVE
Europe’s banks had one other constructive quarter, as nonetheless excessive rates of interest supported margins.
The European Central Financial institution is about to additional decrease borrowing prices, but buyers stay optimistic.
“Interest rates will be structurally higher than what they were in previous cycles,” mentioned Thomas McGarrity, director, head of equities at RBC Wealth Administration.
“That’s very helpful for banks. We’re not going back,” McGarrity added.
Information from LSEG I/B/E/S estimates earnings development for financials of 20.6% within the third quarter, the third-highest development fee amongst Europe’s main sectors behind utilities and primary supplies.
Up to now, their knowledge reveals 80% of firms within the sector have crushed earnings expectations.
WEAK GROWTH OUTLOOK PROVIDES SMALL OPPORTUNITIES
Europe’s economic system has stagnated for many of the final two years, hampered by the dominant industrial sector affected by surging vitality prices and comfortable international demand.
Lots of Europe’s bigger firms have a world footprint, however weak home demand is weighing on earnings for small- and mid-caps and the outlook stays fragile.
“We’ve had this downgrade of expectations among companies and the outlook is now saying the recovery is going to happen in 2025,” mentioned Marlborough fund supervisor David Walton, whose technique focuses on smaller firms.
“We’re in a situation where it’s unclear whether there will be a meaningful recovery in growth in 2025, but that creates an opportunity because we’re able to buy companies at low valuations.”
European firms stay traditionally low-cost, buying and selling at 13.6x 12-month ahead earnings versus the long-term common of 14.3x. Mid-caps are even cheaper, buying and selling at 12-month ahead P/E of 12.7x versus a long-term common of 15x.
