European shares faced many challenges this year. Central banks remain dovish, right now few are expecting more than one further rate hike by the Fed this year. The ECB rate cut and the extension of the QE program have brought no significant impulses for equity markets.
Europe's weakness lies rather in its anemic corporate earnings growth, for six years in a row the "game" remains the same. Earnings estimates at the beginning of the year are gradually reduced over the course of the year, de facto there has been no earnings growth in Europe in the last five years. Year to date 2016 earnings expectations have been reduced by 9% in Europe, in Austria as much as 16%! In sum, earnings expectations for 2016 are only marginally greater than 2015 earnings.
Nevertheless markets have risen every year since 2011, resulting in a significant "multiple expansion". Ad Infinitum this game cannot continue, markets are currently valued above fair value. Hopes that stimuli by central banks in recent years would stimulate the real economy did not really work out well, monetary policy has rather inflated asset prices.
Good news are coming currently from overseas markets, the US economy is going better than expected, the Union Leading Indicator (ULI) for the United States points to an acceleration of economic activity in the next quarter. Recently published data from China, such as industrial production, PMI or exports are more positive than expected. It remains to be seen how strong the impact for Europe will be, and whether that translates into profit increases for European companies which are more export sensitive. Following the downturn of the markets since the beginning of the year and pretty expensive bond markets, equities have become more attractive again, but a sustainable recovery has to be accompanied by positive earnings revisions.
Author:
Horst Simbürger, MSc, CEFA
Head of Department Shares and Bonds
Union Investment Austria GmbH
20 April 2016
Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.