Volkswagen Was the Final Straw for Europe Stock Forecasters

  • Most strategists cut projections for European stock indexes
  • More disappointing data from China may hurt targets further

How Should Volkswagen Deal With Crisis?

If there was any chance optimism underpinning European stocks would prevail after China’s currency blow, Volkswagen AG’s scandal crushed it.

At least eight of 12 equity strategists tracked by Bloomberg have lowered their estimates for where the Stoxx Europe 600 Index will end the year in the last three months, with the average prediction falling to 395. Back in July, they were forecasting the gauge would exceed April’s record to finish at 422. Even in September, four weeks after China devalued the yuan, they were still holding on to bets that strong earnings would fuel the biggest annual rally since 2009. The Stoxx 600 rose to 360.99 on Thursday.

“If we get more disastrous data from China, analysts may need to cut targets again,” said Markus Wallner, an equity strategist at Commerzbank AG in Frankfurt, who projects the Stoxx 600 will cap the year at 380. “China is like a black box with no one knowing what could really happen. Another problem, particularly for the DAX Index, was Volkswagen. They have to make provisions and earnings will fall. It is still influencing the DAX and its sector.”

While economic data in the region are still beating forecasts and the European Central Bank said it’s ready to increase stimulus, that’s little comfort to investors. The Stoxx 600 has lost 14 percent since April and came within 2 percentage points of a bear market in September. Equities in Germany, China’s biggest European trade partner, tumbled as much as 24 percent as VW sank to a four-year low.

Stoxx 600, DAX descent

Strategists now estimate the DAX will finish 2015 at 10,708, according to the average of 12 projections. That’d be 13 percent below its record, also reached in April. The gauge fell to 9,915.85 yesterday.

Bankhaus Lampe’s Ralf Zimmermann, who cut his rating for euro-area stocks by 9.3 percent since last month, says investors will soon start piling into the cheaper equities. The Stoxx 600 trades at 15.6 times estimated profits, down from 17.4 in April.

“Earnings won’t fall off the cliff, but even stagnating earnings would be a relief as investors already fear a decline,” Zimmermann said in an interview from Dusseldorf. “The rebound in stocks isn’t driven by a strong and accelerating economy, but by a relief that a global recession will be prevented. There is a decent chance that we see some relief in markets.”

Analysts have cut projections for 2015 earnings growth at Stoxx 600 companies to 3.9 percent, from 6.5 percent in August, before the China-induced selloff. This makes some traders, such Alex Neil from EFG Bank in Geneva, more cautious on equities, even after a six-day rally that took the benchmark index to a one-month high following the Federal Reserve’s decision to delay an interest-rate increase.

“We’ve seen some of the biggest cuts to consensus estimates across the board that I can remember,” said Neil, head of equity and derivatives trading at EFG Bank. “I worry that in the absence of any genuine top-line growth delivery from companies, investors’ cheering of prolonged Fed inaction will turn into tedium. It’s crucial that we see revenue growth.”

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