European firms H2 earnings show solid performance from sectors like telcos, airlines

European H2 earningsEuropean H2 earnings solid

Sector earnings from Europe for the second half of 2017 have been overall solid, with some positive surprises from “heavy cyclicals” like oil and metals and mining.

Telecos have benefited from less competitive and regulatory pressure, as well as an improvement in margins, according to Carax Alphavalue’s Pablo García Gómez. “And free cash flow (FCF) has given their dividend policy visibility. With respect to the airlines, the figures are good, but their strong performance over the year has fuelled profit-taking.”

The technology sector has faired well both in Europe and the US, while banks and insurers “are meeting expectations, although with no big surprises, which is no small achievement,” García Gómez said.

“The biggest positive surprises have come from heavy cyclical sectors (oil, metals and mining and chemical). Their progress has been very modest and risky, but they are beginning to see more visibility on the macro side (demand) and in the prices of raw materials (commodities).

On the downside, we have been disappointed by the automotive sector (there is no let up on dieselgate), pharmas, health and HPC (the high valuations don’t justify the risk) and media (less visibility).”

Do current valuations still allow for some potential?

While Carax Alphavalue’s view of the US is currently more neutral (good fundamentals, but already reflected in the share prices), García Gómez believes Europe can still offer potential of over 6% from now to end-2017.

And what about the bond market and the central banks’ next moves? García Gómez explains:

“Alan Greenspan (ex-Fed chair) warned that “although there is no bubble in the stock prices, we will see what happens when bond prices begin to drop.” Greenspan flagged that “inflation is not going to remain at historically low levels.” Therefore “such low long-term interest rates are unsustainable.” He believes any movement in bond prices could be very fast and that the market has not discounted this.

So a warning. But, in any event, we have talked about this subject on various occasions. The wolf will come, yes, but when and how. Up to now, a sell stance on bonds has proved disastrous. Although I agree with the fundamentals of Mr Greenspan’s analysis…naturally.”

García Gómez remains optimistic about the central banks:

“I have always defended clarity in the message and predictability in the actions of monetary policy. Both Mario Draghi and Janet Yellen have fulfilled their functions rigorously. As a result, I am not over concerned about the pace of rate hikes in the US or the calendar for tapering in Europe. That said, it will obviously be important for short-term traders to keep an eye on the progress of these unknown factors.”

Where could the potholes in the road appear?

Carax Alphavalue sees the euro’s strength (or the dollar’s weakness) as perhaps one of the main problems in the second half of the year, as it could affect the big European exporters. And this could drag on the good earnings performance in Europe. “We have been buyers of the euro vs the dollar from the 1,06 dollar level, but, frankly, from the 1,16 dollar level onwards we don’t see much potential.”

Another hurdle will of course be the progress on the Brexit negotiations and its effect both on the UK and the Eurozone economies.

“As far as possible problems with populism in Europe, we don’t believe these will be thorny. It’s a well known fact that when the economic situatin improves, people stop shaking their fists and look for more efficient, less eloquent managers.”