Earnings forecasts for pan-European equity markets are finally starting to look credible in the eyes of the continent’s fund managers.
FTfm reported in September that asset managers had completely lost faith in the forecasts of sell-side analysts – buying into sectors analysts were downgrading and selling those they were upgrading – a level of disconnect unseen for more than a decade.
However, data from State Street Global Markets suggest the correlation between changes in consensus sell-side earnings forecasts and institutional investment flows, as measured by its custody operations, is now back towards historic highs.
In the past six weeks the sell-side analyst community has downgraded earnings forecasts for energy, capital goods and consumer durables and institutional investors have withdrawn money from these sectors.
In contrast, institutional money has flowed into the sectors where analysts are becoming more bullish, such as food retailers, household products, food and telecoms.
The analysis suggests the earnings estimates of sell-side bottom-up analysts are now being trusted once again. “It takes [analysts] a while to catch up with what is going on. But earnings forecasts are now believable,” said Andrew Capon of State Street. Forecasts for the MSCI Europe index suggest earnings growth of 8.7 per cent in 2009, down from a forecast of 13.4 per cent in mid-September.