Which is the best support for European equities : earnings… or US investors ?

Maybe both actually… Sector rotation has been « brutal », to take UBS’s strategists Nick Nelson and team own words.

After a sharp rebound after the trough of Feb 2016, which amplified after the victory of Donald Trump, European equities have rerated nicely. P/E 12m forward has jumped from c14x before Trump’s victory to 15x right now, explaining some of the rebound in the market ; the rest comes from positive earnings revisions, which are helped by both a better macro picture in Europe and globally, but also the « fade out » of some negative factors that dragged the performance of European equities for most of the past couple of years : namely, commodities (sharp rebound in 2016 from very depressed levels), EM growth (that seems to be improving softly) and the return of inflation.

Source: UBS

Source: UBS

Yes, you’ll have to take a microscope to see it, but that’s enough to let many investors hope that the turnaround in European earnings is finally happening…

From UBS team in a note date Jan 12:

« European corporates are seeing the most earnings upgrades since 2010 – but the context is 6 years in a row of downgrades. The good news is the 3 key drags for earnings are switching from headwinds to tailwinds: commodities, lack of inflation and Emerging markets. Critically, earnings upgrades are finally being driven by revenue upgrades – the best in 17 months. This is a sign of a sustainable turn in the profit cycle. »

The positive momentum behind European equities might continue and amplify, especially if US investors start pouring money in the asset class, which seems to be the case, according to UBS :

« Data from our Global Equity Finance Team show US equity ETFs have seen net buying of $183.5bn since January 2016. The picture in Europe is in stark contrast. After seeing cumulative net selling of $35.8bn at the low, this turned on 9 November since then there has been net inflows of $3.6bn.

One of our upside risks in our 2017 Outlook was that US investors come back into the market driven by better macro data and, critically, a turn in European earnings for the first time in 7 years. After 9 months in a row of selling, US investors have turned net buyers of Europe in the last 2 months. »

Are there many opportunities left in the market ? Some, especially if you consider valuations are not that expensive.

Source: UBS


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