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European Equities Have a Cushion in Strong Earnings

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Strong earnings season is helping European equities

European equities, meanwhile, at least have the cushion of strong earnings, partly fueled by the euro’s weakness. In Europe, with Greece fading as a concern at least temporarily, investors are renewing their focus on earnings. According to Bloomberg data, as of Friday, roughly 55 percent of European companies beat estimates, with average year-over-year earnings-per-share growth of 15 percent. Banks and consumer discretionary companies did particularly well, with 75 percent exceeding expectations.

 

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Market Realist – European equities (EZU) have been benefiting from the tailwinds of the European Central Bank or ECB’s quantitative easing program and the weakening euro. The euro has been struggling for the past year in the wake of declining oil prices and the Greek debt crisis. This has been a blessing in disguise for European exporters, which have benefited from the weakening currency. The previous graph shows the decline in the euro against the US dollar over the past year.

According to estimates by Bloomberg, Stoxx Europe 600 index (VGK) companies are likely to register a blended earnings growth rate of 6.7% in Q2 2015. The windfall in earnings is anticipated to be driven by 18% growth in the earnings of banks and financials. According to a recent note by strategists at HSBC Bank, 55% of the companies that have reported so far have exceeded analyst estimates. This is much above the long-term historical average of 48%. HSBC strategists have also stated that Europe’s earnings, excluding the United Kingdom, are estimated to grow by 25% this year.

The following is a snapshot of European corporates (IEV) that have posted positive earnings in Q2 2015:

  • Credit Suisse (CS) exceeded analyst expectations by posting a net profit of 1.1 billion francs or ~$1.15 billion in Q2 2015, up from the 700-million-franc loss it suffered in Q2 2014. The losses in Q2 2014 were largely on account of a settlement with the United States pertaining to tax evasion.
  • The global consumer giant Unilever (UN) reported underlying sales growth of 2.9% for the first half of 2015. The stellar growth in revenues was bolstered by a 6% underlying sales growth in emerging markets.
  • Hotel group Accor reported a 4.1% rise in revenues and an 8% rise in operating margins in the first half of 2015 despite headwinds from operations in France and Brazil.
  • Deutsche Bank (DB) reported a threefold increase in its net profit in Q2 2015 while revenues increased by a whopping 17%. Though the earnings report looks largely upbeat, the bank is weighed down by legal settlement costs on account of its involvement in the manipulation of benchmark interest rates.
  • Nokia (NOK) has posted a massive 51% year-over-year increase in net profits and a 9% increase in revenues in Q2 2015 on the back of stellar software sales and currency tailwinds.

European equities are likely to perform well in the coming months as the Eurozone recovery gets underway while the ECB continues with its easy monetary policy.

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