European corporations present “shocking resilience” – and higher worth than the US

A trader works as a screen displays trading information for BlackRock on the floor of the New York Stock Exchange (NYSE) in New York City on October 14, 2022.

Brendan McDermid | Reuters

LONDON – European corporate earnings were surprisingly resilient in the fourth quarter of 2022 and the continent’s stocks are likely to continue to outperform the US, according to data BlackRock.

With earnings season winding down, the Wall Street giant highlighted in a note on Tuesday that fourth-quarter results in Europe showed corporate health extended beyond the region’s solid banking and energy sectors.

“Companies in Europe have surprised analysts with their recent earnings performance. Regional equity markets have performed well year-to-date but remain at a discount both on a historical basis and relative to US peers,” said Helen Jewell, deputy head of EMEA investing officer at BlackRock Fundamental Equities.

Banks and energy enjoyed a bumper fourth quarter, BlackRock noted that gains on the pan-European Stoxx 600 index up around 8% annually up to the end of February, even excluding the energy sector.

“Europe is the only region in the world where 2024 earnings revisions are just back in positive territory,” Jewell said.

“UK earnings were also a positive surprise, even when adjusted for the size of the financials and energy sectors.”

Jewell indicated that momentum for European banks, buoyed by positive interest rates, is likely to continue as valuations remain attractive.

The Euro Stoxx Banks index was up almost 24% year-to-date as of Tuesday morning, but Jewell noted that the earnings strength means the price-to-earnings ratio remains below the sector’s long-term average.

The price-to-earnings ratio determines whether a company is over- or undervalued by measuring its current stock price relative to its earnings per share.

“We were positive on financials in the middle of last year and believe the sector is capable of further outperformance in 2023 as the European Central Bank remains committed to controlling inflation and higher interest rates could allow more banks to push cash to shareholders repay. ‘ said Jewel.

Big energy companies in the UK and Europe posted record fourth-quarter profits on the back of rising oil and gas prices, but a warmer winter has since translated into lower-than-expected physical demand.

In the medium term, BlackRock expects continued supply constraints and believes European oil majors will continue to generate massive cash flows.

“These companies are trading at a discount to US peers and continue to invest heavily in renewable forms of energy,” Jewell added.

Despite the resilience so far, she stressed the importance of profit margins in 2023 as central banks continue to tighten monetary policy and end an era of easy money.

According to MSCI data compiled in late February, around 60% of European companies beat fourth-quarter sales expectations, while only around 50% beat earnings. A similar picture emerges in Great Britain

“This is consistent with what companies across all sectors have been telling us about the increasing impact of wage inflation at a time when slowing economic growth has made passing on costs more difficult. We believe companies with higher labor cost risk will continue to struggle into 2023,” Jewell said.

“We see many opportunities for investors in the region, although it is important to be selective as profit margin pressures can lead to dispersion across sectors and within industries.”

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