European companies are preparing to enter their first earnings recession - two consecutive quarters of profit declines - since 2020.
The outlook for European stocks does not look rosy, with an earnings recession looking likely and a prolonged period of high interest rates. However, investors argue that much of the bad economic news is already embedded in prices and, in some cases, may even be providing support.
The war in the Middle East has pushed investors into safe havens, but signals from central bankers that they may not raise interest rates again have brought the pan-European STOXX 600 index (.STOXX) close to record highs. last three weeks. After a long period of skepticism towards European stocks, some investors and analysts are finding reasons for optimism.
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A combination of high interest rates, uncertain geopolitics, and a declining economy is usually not good for stocks, Jefferies said, but in the current environment, where rising government bond yields have lured funds away from stocks, it could be positive
“Any sign of weakness in the economy would lead to lower real yields and help risky assets,” said strategist Mohit Kumar.
Deutsche Bank recommends an overweight position, arguing that weaker growth, missed earnings forecasts, and central banks’ reluctance to cut rates are largely already priced in, “leaving upside potential for positive surprises”.
European companies prepare to enter their first earnings recession - two consecutive quarters of declining earnings - since 2020.
In the third quarter, earnings of STOXX 600 companies are expected to decline 11.4% year-on-year, following a 5.9% decline in the previous quarter, according to LSEG I/B/E/S, as the trading season quarterly financial statements start to come in. Earnings growth is expected to return only in the second quarter of 2024.
But European stocks are better priced for a recession than their U.S. peers, said Matthew McLennan, co-head of First Eagle’s Global Value team.
“In some ways, the US market is evaluating the situation as if we are emerging from a recession, with a lot of growth in sight, while I think the European markets are evaluating a more complex reality.”
The STOXX 600 is trading at 11.6 times expected earnings, compared to 17.8 times for the U.S. S&P 500 (.SPX). In 2023, the STOXX is up 6%, compared to the S&P’s 14% gain.
Meanwhile, Goldman Sachs expects positive but limited returns for the next 12 months for the European market.
European banks’ 12-month earnings per share (EPS) forecasts are currently at their highest levels since 2008, but their shares are down 70% from 2007 highs, after banking sector chaos in March which shook investors.
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Europe’s best-performing companies by market value, such as luxury goods maker LVMH (LVMH.PA) and pharmaceutical company Novo Nordisk (NOVOb.CO), are trading at 20 and 34 times earnings per share 12 month-forecasts respectively. LVMH has already reported slower sales growth in the third quarter.
Over the past 50 years, when central banks stopped raising interest rates, European stocks have tended to rise - except for times of economic recession.
When the end of a bull cycle led to a recession, BofA data shows that a decline of 20% or more followed.
Ayesha Akbar, multi-asset portfolio manager at Fidelity, favors defensive sectors, such as healthcare and consumer staples, as “the future appears to be challenging for European equities…Rates will likely need to remain restrictive for a while of time".
First Eagle’s McLennan said the weaker euro partly supports the outlook for European stocks. The single currency is about to record its third consecutive annual decline against the dollar.
“There is a possibility that European stocks, both in terms of their valuation and the valuation of their currency, could perform better than US stocks over time.”
Original article published on Money.it Italy 2023-11-02 06:40:00. Original title: Il futuro incerto dell’azionario europeo. Ecco i settori da monitorare
