LONDON- With markets taking fright again this week over trade tariffs and a faltering global economy, investors are braced for weak third quarter results in Europe and high expectations going forward could come crashing down to earth.
There have been a slew of profit warnings in recent weeks which have stirred worries that the earnings slowdown will spill over into next year as companies grapple with weaker economic growth stemming from trade spats and the uncertainty caused by the UK’s delayed exit from the European Union.
Markets were rattled this week by U.S. manufacturing and services data that fell below expectations, a move by Washington to hit European products with tariffs and worries over Brexit.
It could be the worst week in a year for the pan European STOXX 600 while the euro-zone benchmark is heading for its biggest weekly fall in two months.
After falling into a so-called corporate recession in the second quarter after two straight quarters of profit decline, European companies are expected to report in the coming weeks a 2.2 percent drop in profits in the third quarter, their worst quarter in three years, according to Refinitiv I/B/E/S.
While 4 percent earnings growth is seen as achievable for the United States in the fourth-quarter, interviews with investors, analysts and strategists and companies paint a different picture for Europe for the remaining months of 2019 and into next year.
Companies are taking measures such as cutting costs to shore up profits, but a harder-to-fix drop in demand for products is expected to be evident in company revenues for the July-September quarter, which are seen falling 0.3 percent, the first quarterly turnover drop since early 2018.
There is room for much disappointment given that consensus profit estimates for the fourth quarter and 2020 are still high at around 10 percent growth and analysts say expectations could be brought back down to reality over the coming months.
“The big hurdle for this year would be the fourth quarter, not the third quarter,” said Fabio Di Giansante, head of large-cap European equities at Europe’s top asset manager Amundi with 1.43 trillion euros ($1.6 trillion) in assets under management.
“I would expect more warnings after last week,” Di Giansante said, following the earnings downgrades by Pearson, Imperial Brands IMB.L, British Airways-owner IAG and Carnival Corp that knocked billions of pounds off their market value.
At best, Di Giansante expects profit growth to flatline in 2020 while UBS has pegged a 4 percent drop.
A shift by investors into beaten-down stocks that look value for money in September has caught some investors off-guard, who were heavily invested in momentum stocks – rapidly expanding companies – but ahead of the results season value stocks are likely to be seen as a shelter, giving less of a shock if a company misses estimates.
MSCI global basket of value stocks rose 4 percent, while the momentum stocks slipped 1 percent last month. Before the rotation, momentum stocks had surged 20 percent as of August-end, while value stocks were up just 7 percent.
Di Giansante is among those that have sought safety in cheaper stocks.
“In a normal world, if you’re cheap and you miss, in theory you should have more downside protection, but that hasn’t been the case in the last year-and-a-half,” he added.
For these stocks, “you need to see an inflection point around the corner, if you keep missing, it is postponed”.
The final quarter of 2018 also started with major stock indexes close to current levels and earnings growth expectations for the year ahead around 10 percent.
Analysts ended up slashing earnings growth estimates for 2019 to low single digits and the toxic mix of an uncertain macro environment and earnings downgrades led to one of the steepest sell offs in stock market history in late 2018. — Reuters