January 25, 2013 3:45 pm

Corporate Europe signals slow recovery

As Europe enters a new quarterly earnings season, fund managers and strategists are questioning whether the market is being too pessimistic about the corporate outlook.

“Expectations for Europe remain unnecessarily downbeat,” said Gene Salerno, head of global equities at Kleinwort Benson. “We anticipate [European] corporate earnings in 2013 to surprise on the upside, starting as early as this quarter,” he added.

Mr Salerno is one of a growing chorus of analysts and investors who point to early results from Europe’s quarterly earnings season as an indication that a battered corporate Europe may be on the mend.

Next week will be a key test of this view, with some of Europe’s biggest banks, as well as those worst hit by the eurozone crisis, reporting their results.

Of the 16 companies to report so far, more have beaten consensus earnings and revenue estimates than have missed, according to data compiled by Thomson Reuters. A total of 300 companies are expected to report quarterly earnings before April 1.

The results follow a dramatic scaling-back of prospects in the second half of 2012 as consensus earnings per share growth estimates fell from near double-digit growth to a decline of 1 per cent.

“Europe earnings estimates show the collateral damage of the euro crisis,” said Philip Lawlor, head of research at FTSE Group.

The view is underpinned by data that show expectations for EPS growth on a 12-month, forward-looking basis across Europe are hovering near five-year lows, while in the US expectations have hit a five-year high.

“The data is clearly showing that we are closer to the bottom of the cycle from 2009 rather than the top,” Mr Lawlor added.

But even the most bullish analysts remain cautious. Nigel Bolton, head of European equities at BlackRock, said: “This is not a gung-ho recovery. It is a slow and grinding recovery – but things are getting better.”

This is not a gung-ho recovery. It is a slow and grinding recovery – but things are getting better

- Nigel Bolton, head of European equities at BlackRock

This view was reinforced by companies reporting this week. Industrial bellwether Alstom said it expected “strong” order intakes for the first quarter of 2013 but admitted its full-year target would not be easy to reach.

Siemens beat consensus expectations for its first-quarter results after what Europe’s biggest engineering group by sales called a “solid” start. However, it reminded shareholders that its customers remained cautious in the final three months of 2012.

Nokia slashed its dividend for the first time in its history but unexpectedly boosted its cash position by €800m to €4.4bn in the fourth quarter and said its mobile business had returned to profitability.

“What we’re hearing from some of the companies we have met with is that they hunkered down last year because of eurozone fears and the slowdown in Asia. They held back on capital expenditure, and we are seeing expectations for capex to pick up,” Mr Bolton added.

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