European companies are set to issue a wave of profit warnings in the coming months as earnings are expected to fall by about 40 per cent by the end of 2009.
Executives at companies in continental Europe and the UK are increasingly gloomy about the prospects for 2009 and many expect a prolonged recession before a slow recovery starting in 2010. But consensus forecasts for earnings next year – compiled by industry analysts who are often briefed by companies – still point to a 10 per cent increase in profits in Europe, whereas equity strategists think there will be a 30-40 per cent fall.
“There is a big change that needs to come,” said Adrian Cattley, European equity strategist at Citigroup, who is forecasting a 10 per cent drop in earnings this year and a further 30 per cent fall next. He added that there would be many more profit warnings as companies adapted to reality: “Companies take a long time to move from thinking things are good to they are bad.”
Companies from Daimler and Renault to Air France-KLM and reinsurer Hannover Re have recently issued profit warnings, with analysts saying more is to come. Citi ranks the sectors with the highest risk to consensus earnings as banks, cars, technology and miners.
Karen Olney, European equity strategist at Merrill Lynch, said earnings had fallen by 30-40 per cent in the four previous recessions: “Will it be any different this time? It could be worse; it is unlikely to be better, given the state of the credit markets.”
Two of the UK’s leading chief executives told the Financial Times last week that they expected a deep and prolonged downturn in the UK and elsewhere.
Mark Tucker of insurer Prudential said about the UK: “Our base case scenario would point to [recession for] the rest of 2008 and probably leading to late 2009, then seeing some sort of anaemic slower recovery in 2010.” Andrew Witty of drugmaker GlaxoSmithKline said: “I suspect those challenging times are going to be around for a few years.”
They were echoed by European executives. Mikhail Shamolin, head of MTS, Russia’s largest mobile phone operator, said: “I think the whole of 2009 is going to be quite rocky.” Franz Fehrenbach, chief executive of privately held German industrial conglomerate Bosch, said earlier this year: “2009 is looking tougher with every day.”
Stock markets have priced in much more of a downturn than many companies or analysts and Mr Cattley said shares usually stopped falling three to six months before earnings. He said the earnings trough could come in about a year.
The profit warnings are likely to have ripple effects through the real economy, including thousands of job losses, with companies such as UniCredit of Italy and Henkel of Germany showing the way with recent announcements of redundancies.