UBS House View Daily

Thought of the day

02.08 - (Don’t) mind the gap

Almost half way into the European second-quarter earnings season, fewer companies have beaten expectations than in the first quarter. With nearly half of all EMU companies reporting, 51% beat earnings-per-share estimates, down from 66% in the first quarter. As a result, year-on-year EPS growth has slowed to 8%, from 17% in the first quarter, hurt in part by a stronger euro and lower oil prices.

But, while the data don’t appear supportive of European equities, we believe there is much to remain positive about:

  • Even as EPS growth slows, the average EPS has beaten expectations by 3%. Sales have been slightly better too, with 53% of firms beating consensus estimates.
  • The Eurozone has grown at its fastest rate since the debt crisis five years ago. Eurozone GDP growth accelerated from 0.5% to 0.6% in the second quarter, compared with the same period in 2016, pushing year-on-year expansion to 2.1% from 1.9% – the highest rate since the second quarter of 2011.
  • Investors are returning to Europe. Net inflows into European equity funds year-to-date have reached USD 71 billion, almost fully recovering from last year's withdrawals, according to EPFR Global Data. Last week's inflow of USD 4.7 billion was the 33rd consecutive week of net purchases.

So we believe that both the improving economic backdrop and the outlook for corporate earnings justify confidence in Eurozone equity performance.

Chart of the day

Eurozone earnings finally show recovery

(EMU 12-month forward EPS in euros, rebased to January 2010)

Don’t mind the gap

Source: UBS, Thomson Reuters Datastream, as of 2 August 2017

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