Bank of America – Excessive Bar for European Revenue Rebound Leaves No Room for Setbacks

Photographer: Chris Ratcliffe/Bloomberg

Europe is kicking off the 12 months’s first earnings season with expectations working excessive after a robust fairness rally, setting the stage for disappointment if corporations sign additional pandemic ache.

With luxurious model Burberry Group Plc, chip gear maker ASML Holding NV and miner Rio Tinto Group amongst some 30 corporations within the Stoxx Europe 600 Index posting earnings or gross sales updates within the subsequent week, traders are searching for reassurance a few restoration past the lockdowns presently weighing on sentiment. Analysts predict a robust revenue rebound this 12 months, following final 12 months’s sharp stoop triggered by the influence of Covid-19.

ADVERTISEMENT

Whereas equities have surged about 20% for the reason that finish of October on optimism about vaccine rollouts and additional stimulus measures, revenue forecasts have been sluggish to catch up, making European shares close to the most costly on report. That may depart traders in a much less forgiving temper, as seen by Simply Eat Takeaway.com NV’s stoop after its outcomes.

“We’re constructive on the 12 months forward,” Grace Peters, EMEA head of funding technique at JPMorgan Personal Bank, mentioned. “There’s lots of things that we’re looking for this earnings season,” she added, citing forward-looking earnings steering and commentary on capital expenditure and dividends.

Earnings are anticipated to develop 40% this 12 months, following a 36% stoop in 2020, based on Bloomberg Intelligence. The hitch, a minimum of within the brief time period, is the brand new wave of lockdowns throughout Europe threatening such a restoration.

Some corporations may say there’s nonetheless an excessive amount of uncertainty to present detailed outlooks, based on Philipp Lisibach, head of world fairness technique at Credit score Suisse Group AG. “Once we have the reporting of first-quarter numbers, companies will be more comfortable guiding,” Lisibach mentioned.

Right here’s among the sectors to keep watch over:

Keep-at-Home Tech

Meals supply, e-commerce and residential leisure had been among the many greatest beneficiaries of lockdowns, however given their excessive valuations now, any sequential declines in development charges from right here may be taken badly, based on James Rutherford, head of European equities on the worldwide enterprise of Federated Hermes. Simply Eat Takeaway shares have tumbled greater than 13% for the reason that firm’s fourth-quarter replace on Wednesday, with JPMorgan analysts saying its margin steering was “clearly disappointing.”

Chipmakers

Experiences from Dialog Semiconductor Plc and and STMicroelectronics NV already counsel an uptick in demand for chips. Semiconductors is an space that’s more likely to profit from each a cyclical restoration and the longer-term digitalization of the economic system, based on JPMorgan Personal Bank’s Peters. The shift towards electrical autos, good automation, synthetic intelligence and massive knowledge all rely upon the sector, she mentioned.

Development

European development companies with publicity to the residential sector, significantly within the U.S., are presently benefiting from housing market energy, based on Peters. Shares of France’s Cie. de Saint-Gobain SA jumped earlier this month on better-than-expected gross sales numbers.

Mining

Prospects look bullish for miners. Earnings estimates for 2021 for basic-resources corporations have seen upgrades of 24% over the previous three months, pushed by rising iron ore and copper costs stemming from a restoration within the Chinese language economic system and monetary stimulus applications in Europe and the U.S., Laurent Douillet of Bloomberg Intelligence mentioned in a observe.

Power and Utilities

Expectations for power companies are nonetheless “very negative” regardless of a rebound in oil costs, Joost van Leenders, senior funding strategist at Kempen Capital Administration, mentioned. That’s partly as a result of shift towards clear power gaining much more momentum. UBS Group AG analyst Sam Arie expects banks to cut back finance for fossil tasks and scale up help for renewables. Three stocks to play that development are Enel SpA, RWE AG and Engie SA, Arie mentioned.

Nevertheless, after an enormous rally for renewables in latest months, Bank of America Corp. warns that share costs may be exhibiting indicators of a bubble.

Financials

Regardless of the headwinds of ultra-low rates of interest, Giles Rothbarth, supervisor of the BlackRock European Dynamic Fund, mentioned strong capital ratios and low loan losses depart potential for a resumption of dividends as soon as regulators loosen up restrictions. In the meantime, for asset managers, UBS analyst Michael Werner mentioned latest charge cuts ought to lead to decrease fairness market volatility, boosting inflows. European equities attracted $2.2 billion of inflows within the week by means of Jan. 13, essentially the most since June, Bank of America strategists mentioned in a observe citing EPFR World knowledge.

Journey and Leisure