Slide in Euro helps Europe’s Earnings outpace U.S. Results

The relentless slide in the euro is proving a major boost to European earnings after years of stagnating profits, just when U.S. results start to lose steam.

As Europe’s earnings season draws to an end, companies have reported a 15.9 percent surge in fourth-quarter profits – the biggest rise in European earnings since mid-2011 and well ahead of a 6.8 percent rise in U.S. quarterly profits – with European firms starting to reap the benefits from a lower currency.

The euro has fallen by about 25 percent against the dollar over the past year. This is set to give a major lift to European companies as roughly 50 percent of euro zone earnings are coming from outside the region.

“Clearly, the weakening of the euro is a tailwind for most of Europe’s corporate world,” said Paras Anand, head of European equities at Fidelity Worldwide Investment.

“Earnings expectations for Europe have been very low. Now, the weakness of the euro versus the dollar could continue for quite an extended period of time, and this will prompt investors to upgrade their earnings forecasts not only for 2015, but also for 2016 and 2017 as well.”

Strategists have said a drop of 10 percent in the euro versus a basket of currencies will translate into a 6 to 8 percent rise in European profits. With the euro down 16 percent against the other currencies, profits are poised to get a 10-13 percent boost.

The single currency has been retreating on prospects of a quantitative easing campaign from the European Central Bank, which was launched earlier this week, contrasting with the trajectory of monetary policy in the United States where the Federal Reserve is seen raising interest rates in mid-2015.

With the dollar on the rise, a number of U.S. bellwethers, including the world’s No. 2 PC maker Hewlett-Packard (HPQ.N), have started to warn on the potential negative impact from exchange rates.

According to data from Thomson Reuters I/B/E/S, U.S. corporate outlooks for the first quarter have been negative. Overall, there has been 5.2 negative pre-announcements for each positive one, much higher than a long-term average ratio of 2.6, with the strong dollar the most frequently cited negative factor.

“U.S. corporate earnings are clearly getting hurt by the dollar,” said Toby Campbell-Gray, head of sales trading at Tavira Securities.

The growing divergence in European and U.S. earnings is starting to show up in analyst forecasts.

European profits are seen rising about 5 percent in 2015, a relatively low figure due to the steep drop in profits seen for oil companies, while U.S. profit growth is seen grinding to an halt this year, up 1.6 percent, I/B/E/S data shows.

This makes the differential in favor of European profit growth the widest in six years.

Andrea Williams, European equities fund manager at Royal London Asset Management, said European earnings are set to improve even more later in the year as the benefits of the lower euro, as well as lower oil prices, has not yet been felt by many companies.

“Many firms would have hedged for this in the first half, so the positive effects may well come through later on in the second half,” she said. “On a relative valuation, a lot of people are switching out of the U.S and into European equities.”

The emerging divergence in earnings trends on the two sides of the Atlantic has started to have an impact on share prices, with Europe’s STOXX 600 .STOXX benchmark up 16 percent since the start of 2015 while the S&P 500 .SPX is down 0.9 percent.

Source: Reuters