Investor hopes fade as stock support dims
Cuts to profit forecasts outnumber increases
ANY hopes that investors had of earnings growth salvaging what is poised to be the first down year for stocks worldwide since 2011 are quickly fading.
Cuts to profit estimates outnumber increases by the most in three years, and the pessimism could reach levels last seen during the financial crisis, based on an index tracking the changes compiled by Citigroup.
China’s slowdown, a fragile recovery in Europe, and disappointing US economic reports are combining to jeopardise one of the key drivers of a bull market that saw stocks rise as much as 156 percent since 2009.
“Fundamentals aren’t great anywhere,” said Peter Dixon, a global equities economist at Commerzbank, who recommends trimming allocation to stocks. “It has become a fairly difficult background for corporates to operate. Valuations will start looking more stretched, and a lot of people are begin- ning to wonder whether we’re nearing a wider correction.”
While declining oil prices are to blame for a big chunk of the profit reductions this year, especially for American companies, the latest round of cuts reveals a deeper issue. Evidence that emerging markets from Asia to South America are suffering just as enthusiasm over the US economy fizzles has caused economists to trim their 2015 global growth forecasts to just 3 percent, which would be the least since 2009, from 3.6 percent last year. They project an expansion of 3.5 percent in 2016.
Citigroup’s earnings revision index, a measure compiled weekly that shows the number of analyst downgrades versus upgrades to global profit estimates, dropped to minus 0.39 in September, the lowest level since July 2012. That’s down from a high this year of minus 0.03 in May. In 2009, the gauge reached minus 0.62 and averaged minus 0.28 in the first half of the year.
Data show earnings at companies worldwide will climb about 4 percent this year and 10 percent the next.
Forecasts for 2016 are too high, Citigroup indicated in a September 24 report. The bank says that a drop of 3 percent is likely if the global economy slows to 2 percent, a scenario it considers possible.
After years of resilience from corporate America, analysts project earnings for Standard & Poor’s ( S&P) 500 index members will be flat in 2015. That would be the worst performance since 2008, before an estimated rebound of 9.4 percent in 2016. Profits are forecast to increase 4.8 percent in Europe this year, down from the 11 percent predicted in March, and will fall 5.8 percent in the emerging markets, according to estimates.
The rally that has lifted equity valuations since 2009 with the help of aggressive central bank stimulus is now fading as the Federal Reserve prepares to raise interest rates. After rising to a five-year high of 18.5 times earnings in April from 11.1 in 2009, the MSCI all-country world index’s price-earnings ratio has slipped to 16.4, near its level from October. In less than four months, global equities have lost $12.6 trillion (R174.9 trillion) in value.
“You can’t expect multiples to expand much further from here,” said Andrew Parry, the head of equities at Hermes Investment Management in London. “Slowing growth is problematic in a world of higher rates.”
France’s L’Oreal forecast that growth in the cosmetics industry would be at the low end of an earlier estimate. Swiss miner Glencore trimmed the earnings outlook for its trading division as commodities kept on falling. Caterpillar and FedEx cut their annual projections, while South Korean giant Samsung Electronics lowered prices for some of its smartphones to combat weakening demand. One bright spot is Japan, where profits will probably jump 20 percent. Just as a stock market boom since 2012 helped banks reap higher profits, a weak currency continues to bolster earnings for exporters such as Toyota Motor. The yen reached a 13-year low versus the dollar in June.
Bulls may take comfort from cases where scepticism has been proved to be overblown. US first-quarter earnings unexpectedly held strong against a rising dollar and plunging oil prices, while the pace of Europe’s economic recovery, even though fragile, is still on track.
Yogi Dewan, the chief executive of Hassium Asset Management, said the earnings cuts had been too deep and recommended investors take advantage of the sell-off.
Excluding energy stocks reveals a better picture. The remaining S&P 500 companies will increase profits by 7.1 percent this year, analyst estimates show. And while Morgan Stanley expects European earnings to be flat in 2015, removing commodity-related shares means they will probably increase by an average 9 percent over the next three years, according to a note this month. – Bloomberg