Interestingly the 40 per cent that disappointed (or the handful that produced profit warnings) have not suffered as much punishment as usual in terms of stock price declines, with Citigroup estimating the average penalty this year at just less than 10 per cent for those issuing profit warnings. UK companies and retailers in particular appear to dominate this year’s profit warnings.
Although organic growth appears to be good and balance sheet health restored, investors remain more interested in cash today than cash tomorrow, and company managers in Europe (the paid pipers) have played the required tune.
This can continue if company managers cannot find enough internal or acquisition investment opportunities to fuel longer term growth. The US experience is that this period is coming to a close, with an increase in merger activity and capital expenditure. US firms are posting a greater proportion of positive earnings surprises than in Europe, reflecting the more advanced state of the economy. However, European equities have started outperforming as investors recognise that US earnings are at an historic peak and progress will be harder to make in the future. Where does this leave European assets?
Firms that return an increasing proportion of profits to shareholders may perform well for a little longer, but the tide is likely to turn towards those with bolder plans, and we expect investors to be more supportive of mergers and enhanced capital expenditure this year. Since nominal and real borrowing costs are low (and in several cases corporate bond yields are lower than dividend yields), the possibilities for leveraged expansion are an obvious risk for corporate debt holders, whether this acquisition activity comes from the quoted or unquoted sectors.
This year the eurozone looks as sluggish at the overall level as one year ago. If there are signs of life, they are most evident in France, where the housing market is leading the economy forward and further liberalising measures will provide further support. Longer term optimists may point to the effect of private and public sector reforms encouraging business investment, although consumer sentiment and domestic demand seem as elusive as ever.
Rick Lacaille, European chief investment officer, State Street Global Advisors
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Europe: Expect mergers and other bold moves
March 2005
The European earnings season is well under way, and the pattern of positive surprises seen during 2004 has continued. Almost 60 per cent of companies reporting this year have matched or exceeded analysts expectations, reflecting greater than expected cost controls, a little more growth in some domestic economies and perhaps excess conservatism in the analyst community. Related articles: |
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