- The Euro Stoxx 600 index is up by 7 percent year-to-date, but some are worried that such interest in European equities has been disproportionately boosted by earnings forecasts that were too positive
- Data collected by Reuters show that third-quarter earnings in Europe are expected to increase 5.3 percent from a year ago
With another earnings season in Europe about to kick off, one equity analyst is concerned that European firms won't deliver as much return as was expected at the start of the year.
The dissipation of political risks along with strong growth figures and a pickup in inflation have boosted investors' interest in European stocks — the Euro Stoxx 600 index is up by 7 percent year-to-date. However, some are worried that such interest in European equities has been disproportionately boosted by earnings forecasts that were too positive.
"I need to see more than hope and consensus, which is consistently wrong," Daniel Lacalle, chief economist and investment officer at Tressis Gestión, told CNBC last week. His concerns stem from a belief that investors are using a recovery in Europe to buy stocks but based on a metric that has consistently been downgraded over the last 10 years. He believes that the company forecasts made at the start of the year will prove wrong when the final annual numbers are reported.
Data collected by Reuters show that third-quarter earnings in Europe are expected to increase 5.3 percent from a year ago. Excluding energy, earnings are seen up by 2.3 percent.
Lacalle also warned that in sectors such as telecoms, utilities and industrials, European companies have so far improved their margins from earnings abroad, not from the European Union itself. Furthermore, European firms will continue to be subject to political risks, he said, which could negatively impact their earnings.
Though political risk has dissipated following key general elections across the region, it still hasn't disappeared completely with growing tensions in Spain, an upcoming election in Italy and debt talks due in Greece. But, there are investors who believe that the increase in nominal GDP (gross domestic product) in Europe and across the world is enough reason to expect strong performances by European companies this earnings season.
"With a background of global growth which is now looking synchronized across the world for the first time in many years, that's a pretty good environment in which to make money for European companies, which are very broadly based," Stephen Macklow-Smith, head of European equity strategy at JPMorgan Asset Management, told CNBC Wednesday.
In the week commencing October 16, 25 companies on the pan-European Stoxx 600 will report their quarterly earnings.
"Europe is as never bad as you fear; it's never as good as you hope. So you might hope that political risk is now completely receded and of course it hasn't, because there's a populist backlash in many countries," Macklow-Smith said, adding that: "Populism isn't going to go away but the key point to understand is that populism isn't managing to rest control away from central ground."