Growth estimates rise on Europe’s quantitative easing

However, some are sceptical that European stocks can go higher after a 17 per cent rally this year.

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange on July 22, 2015. Reuters

When it comes to corporate earnings, European investors are more interested in what happens in Frankfurt than Athens.

Even as Greece dominated investor sentiment for months, estimates for European profit growth this year have managed to rise – to 12 per cent now from 10 per cent in April, according to analyst projections compiled by Bloomberg.

They are being boosted by optimism about the European Central Bank’s quantitative easing programme and its consequences, according to Bank J Safra Sarasin’s Gabriel Bartholdi.

“Central bank liquidity measures are much more important for earnings than what happens in Greece,” said Mr Bartholdi, a strategist in Zurich. “Most indicators are still improving and create a good base for the economy and the recovery. A lower euro should boost exports. The environment looks very attractive.”

The Euro Stoxx 50 Index rebounded 12 per cent through Monday from a five-month low as concern eased that Greece would leave the currency region. That has led to a record 43 per cent slump in a gauge tracking equity price swings in the past eight days, signalling calmer markets for investors who turn their focus towards earnings.

More than 70 companies on the broader Stoxx Europe 600 Index release results this week, including SAP, Novartis and Daimler. Lenders Banco Santander, Deutsche Bank and BNP Paribas will post earnings next week. The Stoxx 600 is currently 2.8 per cent off its record.

“A very good earnings season could push us a little higher, but I am sure most of us would be pretty happy to end the year at these levels,” said Dirk Thiels, the head of investment management at KBC Asset Management in Brussels. “We could have added to our positions when the market corrected, but we missed the boat and stocks are not cheap any more.”

UBS Group’s Ramin Nakisa is among the more bullish strategists, estimating the Stoxx 600 will end the year at 440, or 9.3 per cent higher. If realised, that will be the best year for European stocks since 1999, helped by the biggest first-quarter rally in 17 years.

“Earnings will ultimately drive this rally,” said Mr Nakisa, UBS’s global asset allocation strategist in London. “We have a fantastic macro backdrop, improving margins, a very favourable currency story and accommodative central banks. Having a bullish view will pay off very well. The market has by no means priced that in yet.”

Euro Stoxx 50 car companies will lead the profit increase this year, with analysts projecting a 54 per cent jump. European sales growth in cars rose in June at the fastest pace in five-and- a-half-years, data showed this month.

Analysts have also raised their estimates on bank earnings this year to a 20 per cent increase, compared with 15 per cent in April. They have tempered predictions for a slump in energy producers’ profit, calling for a 21 per cent drop, from a 30 per cent slide forecast three months ago.

The ECB’s bond buying weakened the euro as much as 14 per cent against the dollar this year. That helped to push up exports in the first quarter, leading to a 0.4 per cent growth in the region’s GDP. The economy will increase 1.5 per cent this year, according to forecasts.

Some are sceptical that European stocks can go higher after a 17 per cent rally this year.

“The momentum is positive, but there remains a question on sustainability,” said Michael Ingram, a market strategist at BGC Partners in London. “The euro zone needs more job creation and higher productivity growth, which would push it into a virtuous circle and a sustainably steeper growth path. And it is not as if European stocks are outright cheap.”

The Euro Stoxx 50 trades at 15.8 times estimated earnings of its members, up from 12.6 in January.

That is still cheaper than US equities, with the multiple for the Standard & Poor’s 500 Index at 18. Société Générale says stimulus from the central bank will push European equities even higher.

“Improved competitiveness thanks to a much weaker euro should provide a boost to the corporate earnings season,” Roland Kaloyan and Kevin Redureau, strategists at the French bank, wrote in a note on Monday. “Euro area equities should outperform.”

Follow The National's Business section on Twitter