THIS year has brought many twists and turns, but there’s been one ever-present topic at the forefront of investor minds: Europe. Attention has understandably been focused on the trials and tribulations of indebted sovereigns.
However, it’s worth looking at another important area – the prospects for European corporate sector earnings in 2012.
Austerity has been spreading around the euro area at an ever quickening pace, and heightened uncertainty has hit business and consumer confidence.
It’s now widely accepted that economic growth in parts of the region is contracting, and this may continue into next year. It’s not surprising then that 2012 forecast earnings for companies in the region have been revised lower over the course of 2011.
Analysts have become understandably negative about the future prospects of European financial firms.
Banks in particular have faced a barrage of headwinds, in the form of increasing regulatory and political pressure, tumultuous market conditions and an unsupportive economic environment.
Readers might be a little more surprised to see that earnings forecasts in the technology sector have come under similar significant pressure.
However, a closer look at the MSCI sector index shows that communications firms Nokia and Ericsson constitute almost a third of the index and neither have had great years. The former is currently undergoing another restructuring, while the latter is becoming less competitive. Both issued profit warnings earlier this year.
Things look a little rosier at the other end of the scale, or at least not quite as bad. Healthcare companies have longer-term revenue streams, so companies such as Roche and Sanofi are held in our analyst portfolio.
Other more resilient sectors include consumer discretionary and energy. Names such as BMW, LVMH and Inditex are likely to continue to benefit from globally diversified revenues.
Meanwhile, energy stocks should see earnings supported by a resilient oil price, which is itself backed by strong fundamentals in the form of diminished inventory slack and heightening geopolitical tensions in oil producing regions.
At first glance, falling expectations for 2012 earnings from companies in the MSCI Europe ex UK index may partially explain the poor performance of European equity markets so far this year.
Viewed alongside the fact that consensus expectations for 2012 are likely to fall further, investors could be forgiven for questioning why they should buy European equities.
Our point is that, even if earnings growth in 2012 was to be flat, this would still suggest a price-to-earnings ratio of 10.3x: a third below the average over the last decade.
This is roughly where equity market valuations have troughed during the last three recessions.
But shares can fall in value: investors might get back less than they invested.
:: Andrew Miller is regional office head of Barclays Wealth in Newcastle
