Worst Profits Since 2006 Fail to Dent Rally in Europe Stocks
The highest proportion of European companies on record are missing profit estimates even as the region’s stocks post their best start to a year since 1998.
Siemens AG (SIE) and Ericsson AB (ERICB) are among the 59 percent of Stoxx Europe 600 Index companies reporting earnings that fell short of forecasts during the current quarter, according to data compiled by Bloomberg. That’s the worst ratio since Bloomberg started collating estimates in 2006, with 39 percent of companies missing projections in an average quarter.
Bulls say the Stoxx 600 will extend this year’s 4 percent gain as the region’s stocks are still cheap and efforts by the European Central Bank to boost lending will help liquidity. The rally will fade as analysts’ 2011 earnings projections are too positive even after a 9 percent cut, according to money managers at Robeco Gestions SA and Banque Palatine SA.
“Analysts in Europe are much too optimistic,” said Yves Maillot, the Paris-based head of investments at Robeco Gestions, which oversees $6.8 billion. “The market is underestimating the potential for negative economic growth surprises.” His Robeco Active Quant Allocation fund topped 96 percent of peers in 2011, avoiding losses in a year when the Stoxx 600 slumped 11 percent.
Twenty of the 34 companies in the Stoxx 600 that released results from Jan. 9 through yesterday had per-share earnings that trailed behind analyst estimates, data compiled by Bloomberg show. Earnings for members of the gauge probably rose by 12 percent on average in 2011 and may increase a further 7 percent this year, according to more than 12,000 analyst forecasts compiled by Bloomberg.
The Stoxx 600 rallied 4 percent in January, the best start to a year since 1998, Bloomberg data show. The measure advanced 20 percent from its Sept. 22 low through Jan. 26, entering the second bull market in less than a year. The index climbed 2 percent to 259.51 today. The surge in stocks is outpacing earnings prospects as Spain’s economy shrinks and borrowing costs in Portugal this week climbed to a euro-era record, according to Matthieu Giuliani, who helps oversee $4 billion at Banque Palatine in Paris.
“Across the board, there has been a clear slowdown in earnings,” said Giuliani. “It’s best to remain cautious.”
Siemens (SIE), Europe’s biggest engineering company, has dropped 2.4 percent in 2012 as fiscal first-quarter earnings missed analysts’ estimates and it cautioned that targets for the full year have become more challenging to reach. Profit at Ericsson, the world’s largest maker of wireless networks, also fell short of forecasts amid slower spending from North American customers.
Analysts reduced estimates for last year’s earnings at Stoxx 600 companies to 23.20 euros a share in December from 25.50 euros in the first month of 2011, according to data compiled by Bloomberg.
Even after last month’s gains, the Stoxx 600 is trading at 10.4 times the projected earnings of its companies, compared with the five-year average valuation of 11.9, according to data compiled by Bloomberg. That means European stocks are still attractive, according to Bill Dinning, the Edinburgh-based strategy chief at Kames Capital Plc, which manages about $75 billion.
“Equities are good value,” Dinning said. “The ECB actions in terms of helping the financial sector have genuinely eased those more extreme concerns and that justifies the market going up.”
The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt withered and funding from U.S. money markets dried up. The central bank lent an unprecedented 489 billion euros ($643 billion) for three years in December. It’s due to hold a second auction on Feb. 29.
Europe remains the most out-of-favor region for global money managers as European Union policy makers grapple with the debt crisis, according to a Bank of America Corp. survey of asset allocators who manage a combined $655 billion. The yield on Portugal’s 10-year bonds climbed to a euro-era record of almost 17.4 percent on Jan. 30 amid concern a Greek debt writedown being negotiated with investors may lead to a similar deal in Portugal.
EU leaders agreed this week on a fiscal-discipline deal that allows for sanctions on high-deficit states and requires members to enact laws to limit budget shortfalls. The U.K. and the Czech Republic refused to sign the pact.
Stock-market gains will not continue until politicians provide solutions that ease investors’ concerns about slowing economic growth in the region, according to Mark Glazener, a Rotterdam-based fund manager at Robeco Groep NV. Robeco oversees 150 billion euros for clients.
“The problems in Europe will continue to haunt the equity markets,” Glazener said in a Bloomberg Television interview yesterday. “We’re coming into a year where GDP growth will be less than last year. The firepower has to come from political solutions.”
Euro-area gross domestic product will contract 0.5 percent in 2012 after growth of 1.5 percent last year, economists’ forecasts compiled by Bloomberg show. An index of executive and consumer confidence in the region’s economic outlook improved less than forecast in January, according to data released by the European Commission yesterday.
“You’ve not even seen 50 percent of companies beating earnings estimates and this shows just how weak the overall economy is,” Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said in a phone interview from Brussels. “Weak economic figures and weak company fundamentals make me cautious on risky assets at the moment.”
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