Photographer: Jason Alden/Bloomberg

Europe Consumers Are Silver Lining to Gloomy Profit Outlook

  • Retail, travel-and-leisure companies survive earnings cuts
  • Domestic-driven demand seen driving euro-area economy

It’s not all bad news for European profits.

While analysts have trimmed their 2016 earnings estimates for virtually all industry groups on the Stoxx Europe 600 Index in the past three months -- with a 2.2 percent contraction for the gauge on average now expected -- delving deeper reveals two pockets of optimism. Profit projections for retail and travel-and-leisure companies have survived the cuts.

In what’s turning out to be another year of disappointing growth, Europe’s consumers may provide the one bright spot. Analysts are banking that a fresh drop in energy prices, as well as lower borrowing costs and improved employment, will help lift earnings for firms that rely on domestic shoppers.

“People have more spending power and more money in their pockets,” said Michael Woischneck, who oversees the equivalent of about $190 million at Lampe Asset Management in Dusseldorf, Germany. “Europe is not just recovering -- it has growth. It’s not stellar growth, but its stable growth that’s very much domestic-driven this time. European consumption is stabilizing.”

Analysts predict average earnings for both industry groups will rise at least 9.3 percent this year. The hope is that a delayed effect from the oil slump and the European Central Bank’s stimulus program will stir home-market demand even as weaker global growth dims sales prospects for export-dependent companies such as Unilever and Pernod Ricard SA

Data this month showed euro-area retail sales increased more in February than expected, capping 28 consecutive months of gains. And while consumer confidence has waned slightly in 2016, it’s still comfortably above the 30-year average. Bank lending has risen in all months but one since the ECB started buying bonds in March 2015.

French supermarket operator Casino Guichard Perrachon SA this month reported a bigger-than-expected increase in quarterly sales for its home market, which accounts for almost half of revenue. Clothing retailer Inditex SA, which depends on Europe for more than 60 percent of sales, posted its fastest annual profit growth in three years. British Airways owner IAG SA said its European and trans-Atlantic markets are performing best, and is buying more planes to tap surging demand.

The Stoxx 600 fell for a third day, after reaching its highest level since January last week.

Still, even as the Stoxx 600 trades near its highest valuation of 2016, profit projections could still be vulnerable. The 2015 annual reporting season fell short of analysts’ estimates by the biggest margin in three years and some companies -- including Ericsson AB and SAP SE -- have already posted worse-than-forecast quarterly sales. Further dimming the outlook, European economic growth is predicted to slow to just 1.5 percent this year, compared with January forecasts of 1.7 percent.

“There is currently no sign that the earnings outlook is improving,” said Michael Ingram, a market strategist at BGC Partners in London. “This leaves us with the years-old game of relying on further multiple expansion to drive performance in European equities.”

While faith in the rebound that sent the Stoxx 600 up 15 percent since its February low has been fragile, with investors pulling money out of European share funds for 11 straight weeks, allocations to retail and travel and leisure companies rose in April, according to a Bank of America Corp. fund-manager survey. The two sectors remain the most-preferred relative to history, the study showed.

“The consumer so far has been the driving force,” said Jasper Lawler, a London-based market analyst at CMC Markets Plc. “Low interest rates, low inflation and improving wages are giving consumers a boost. For the time being, its one of the firmest legs we have to stand on in terms of the European economy.”

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