There is a clear disconnect on the outlook for European earnings between top-down strategists and bottom-up analysts and companies, observes Nick Nelson, European equity strategist at UBS, in the View of the Day column in Thursday’s FT.Nelson, a top-down strategist, expects zero growth in European earnings this year and sees a high risk that earnings could fall, with economists at UBS forecasting a recession in the US and a sharp slowdown in Europe.
By contrast, the consensus forecast among equity analysts is for earnings to rise 9.2 per cent this year and by a similar amount in 2009.
“The starting point now for a slowdown in earnings and a fall in corporate profitability is a high one,” warns Nelson. He points out that profit margins rose from 8.4 per cent in 2002 to an estimated 12.1 per cent last year, well above the long-run average of 9.8 per cent seen over the past 25 years. In previous downturns, profit margins sank below their long-run average, consistently troughing at between 8 per cent and 8.5 per cent.
“Markets were clearly not trading on ‘bubble’ price-earnings valuations going into this downturn,” adds Nelson. “The bad news is that the level of earnings was extremely high.”
UBS identifies autos, banks, construction, capital goods, general retailers and support services as the sectors most at risk of earnings downgrades, given their higher sensitivity to economic growth.