ETF Securities Research Blog

European equities aren’t the great value play they once were

We saw a 9% downgrade in Q1 earnings growth forecasts over the quarter, the largest since late 2014, echoing the downgrades we saw in the US. Regardless, results still missed expectations, with 69% falling short of earnings forecasts, after 70% of companies having reported.

Overall net income was flat but revenues were the weakest since Q1 2012, ending what has been a fairly good run for European earnings since then.

Its been core Europe where the weakness stems, primarily Germany, Netherlands and France whilst the periphery, such as Spain, Italy and Ireland have held out relatively well.
We suspect that some of the weakness has been due to the resilience of the EUR as much of the weakness has stemmed from more internationally focused sectors such as tech and consumer sectors. Whilst industrials missed expectations, quarter-on-quarter growth in this sector has been the strongest, followed by utilities.

Despite a mixed picture for the banking sector, we are seeing loan growth along with a fall in non-performing loans (NPLs). NPLs have fallen by 2.1% percentage points since this time last year, to 8% which is well below the 13% peak reached in 2014. But bear in mind, 8% is still well above its international counterparts which are all sub 3%.

We still expect the EUR strength to remain in coming quarters and is likely to continue to negatively impact the export market. This comes at a time when European earnings and valuations are now close to their long term trend. We are not saying that the poor earnings season indicates that the European economic recovery has been derailed. However, we no longer believe that Europe is a great value play.

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