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European equities: our takeaways from earnings season

Richard Brown, European Equities Client Portfolio Manager, provides an update on Europe’s latest earnings season and looks ahead at the key investment themes that are likely to shape European markets in 2024.

Richard Brown, CFA

Richard Brown, CFA

Client Portfolio Manager


21 Feb 2024
7 minute watch

Key takeaways:

  • Earnings in Europe have played out largely as expected so far, with many corporates reporting poor results, driven in part by a slower response to dovish central bank rhetoric and continued inventory de-stocking. However, select areas in tech and aerospace did report positive earnings.
  • There are ongoing signs of nervousness in equity markets, with more extreme responses to company news, a great deal of sector rotation and large cap outperforming small caps thus far in 2024.
  • As we look ahead, our working scenario is that inflation will remain stickier than it has been in the past, and would caution against anchoring on aggressive consensus forecasts for the fall in inflation.

Hello everyone and welcome to the first in a series of short videos that will be recorded by the Janus Henderson European Equities team. Today I’m here just covering what we’ve seen in the early part of 2024 in terms of earnings season but over the coming days, weeks and months you’re going to hear from our analysts and portfolio managers looking at the key investment themes that are shaping markets in 2024. These will include what we’re seeing from AI driven investments, what we are seeing in terms of the knock-on consequences of weight loss drugs that are taking the world by storm, and as well as deeper dives into smaller more niche industries that we think are possibly undiscovered and look quite interesting from an investment side of things.

But today is about earnings season. So what have we seen so far this year, or indeed what was the backdrop entering this earnings season? Well of course we saw this really quite staggering risk rally through the fourth quarter of last year. From October we really started to see inflation coming in lower than expected and that was met by some quite strong dovish rhetoric from central banks around the world and we saw equities and indeed fixed income respond to that. However, we haven’t really seen that change earnings expectations with regards to this earnings season and that’s twofold really.

First of all, no one really expects those lower rates to have made their way into the real economy yet or indeed into corporate earnings. So the benefits of those lower rates aren’t yet evident yet for that. I think we need to look over the course of the next two quarters for evidence of that.

And then second was around the de-stocking cycle. So following the supply chain disruptions associated with the COVID pandemic, you saw a lot of corporates in Europe and more globally end up with really quite bloated levels of inventory and we’ve seen that sort of working its way out of the system over the course of the last few quarters and it was felt as though that would still be very much evident in this latest earnings season that we had here.

So that’s sort of anchored expectations going into this season. And it’s also meant that the market has been to a degree lacking direction so far in 2024. And what I mean by that is we’ve seen a great deal of sectoral rotation. You know, we’ve seen sort of the winners of last year either being sold heavily or bought heavily and the same with the losers on any given day so far. We’ve seen the response to earnings announcements be more extreme than normal. So up higher on good news, down and much more on bad news. And we’ve also seen smaller companies continue to underperform larger companies. So, although we’ve been in this period so far in 2024, where headline equity returns have been positive, there’s clearly still a great deal of nervousness in the underlying with regards to the direction of the economy from here and what that means in terms of corporate earnings and ultimately what that means in terms of equity valuations.

So, looking at what we’ve heard from corporates more specifically. So, as I stand here today we’ve had just over 50% of corporate Europe announce their fourth quarter earnings. Expectations were low, but they’ve come in a good deal lower. In fact, the first few weeks of this earnings season was some of the worst we’ve seen for over a decade. And what sectors have been driving that? Well, maybe first the more positive sectors – start with the good. We’ve had pretty good news from the tech sector in Europe. How AI manifests itself in Europe is through the semiconductor companies. You know, what we describe as the picks and shovels of the AI world. And they’ve reported some very, very strong numbers. More use cases every day of how AI can integrate into our everyday lives. And you’ve seen that come through in terms of earnings. But I’d say that the one surprise that we saw that sort of came on top of that AI story is actually beginning to see a recovery in handsets and smartphone shipments globally after what’s been a difficult couple of years.

The second area of positive news, I would say, has come from aerospace. Here, we’ve seen a lot of the companies in Europe, they’re very dependent on air traffic growth. You know, they are dependent on service contracts that they sell with their planes. And actually you’ve seen air traffic growth continue to recover really quite nicely after the COVID pandemic.

So that’s really before we’ve seen the Chinese tourists begin to travel again in a meaningful way. And that’s what we’re going to be keeping an eye on as we go through the course of the next couple of quarters there. But that was a sector that produced some very, very strong earnings. Then on the negative side of things, we had large cap pharma excluding Novo Nordisk, Novo Nordisk being the producer of Wegovy, the weight loss drug. But I would say broader large cap pharma, still struggling for innovation, still struggling for growth and again that was very evident in terms of what we’ve seen in this earnings season.

And then on top of that consumer, both consumer discretionary and consumer staples, I think serving to highlight that the cost of living crisis is still biting quite hard on the consumer here in Europe. Although even there, there are some pockets of optimism. What we’ve seen more recently is inflation-adjusted wage growth, that is people’s wages catching up with inflation more generally, inflect in a positive way. And we’ve begun to see that play out in some of the companies that have sort of smaller ticket consumer items. So some of the jewellery manufacturers, for example, in Europe sort of bucked the trend of the consumer more generally and produced some really quite good results as we’ve seen in recent weeks.

And then maybe just finally to say, just before I go, is in recent days again we’ve had the latest inflation print come through. It’s actually surprised to the upside in the US, a little bit to the downside in the UK in fact, which for us just serves as a reminder that we don’t think the fall inflation will go in a straight line. I think there’s still many shocks that are still to come and we would still caution against anchoring too hard on the quite aggressive consensus forecast for the fall inflation over the course of the next 12 months or so that has it coming back down to the to many’s 2% target over the course of the next 18-24 months. We are still believers that inflation will remain stickier than we’ve seen in the past.  And at the moment our working scenario is more of a fed plateau rather than a meaningful fed pivot over the course of the coming few months.

I’ll stop there thank you very much for your time and look forward to engaging with you all in person at some point. Thank you.

 

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

Glossary

Corporate earnings represent a company’s profit in a given period of time.

De-stocking is a process whereby companies seek to reduce inventory levels through production cuts, often after a period of involuntary stockbuilding.

Inflation is the rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures.

Large caps are well-established companies with a valuation (market capitalisation) above a certain size, often $10 billion or more. Conversely, small caps are companies with a valuation within a certain scale, eg. $300 million to $2 billion, although these measures are generally an estimate.

Sector rotation is the movement of money invested in stocks from one industry to another.

JHI

JHI

 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Richard Brown, CFA

Richard Brown, CFA

Client Portfolio Manager


21 Feb 2024
7 minute watch

Key takeaways:

  • Earnings in Europe have played out largely as expected so far, with many corporates reporting poor results, driven in part by a slower response to dovish central bank rhetoric and continued inventory de-stocking. However, select areas in tech and aerospace did report positive earnings.
  • There are ongoing signs of nervousness in equity markets, with more extreme responses to company news, a great deal of sector rotation and large cap outperforming small caps thus far in 2024.
  • As we look ahead, our working scenario is that inflation will remain stickier than it has been in the past, and would caution against anchoring on aggressive consensus forecasts for the fall in inflation.