Which sectors stood out in better-than-expected European earnings season

Europe’s re-opening is about two months ahead of Australia. Pendal’s PAUL WILD explains what we can learn from its recent earnings season

• European re-opening two months ahead of Australia
• Earnings season provides pointer to local sectors
• Banks and financials the big winners

European and north American economies are a couple of months in front of Australia in terms of COVID re-openings.

The current European earnings season has highlighted the stocks and industries, that have benefited from re-openings, and provides a pointer as the Australian economy opens up.

“The European earnings season is going much better than expected,” says Paul Wild, senior fund manager at Pendal’s UK-based asset manager J O Hambro Capital Management.

“The big winner is again financials — especially banks, where there’s strong fee momentum, very strong capital momentum and a further commitment to give capital back to shareholders.

“The bank sector is yielding nearly 6 per cent and that looks favourable given the monetary policy outlook,” he says.

“Elsewhere while energy in Europe is now a small sector, the oil companies have had a strong season because of oil prices. Industrials and technology stocks have been pretty good.”

Heading into the European September quarter earnings season, expectations weren’t high given the loss of economic growth momentum, high commodity costs and supply chain issues wracking the continent.

But with more than two-thirds of the market having reported, there have been plenty of positive earnings surprises, demonstrating the benefits of re-opening.

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“Only two sectors have disappointed. One is utilities and the other is consumer discretionary. In the case of the latter, it is partly because of autos and the semiconductor chip shortage and partly due to the slowdown in China.”

The semi-conductor chip shortage has hit many companies around the globe, but Wild says the tone of conversations among vehicle manufacturers suggests the situation will soon start improving.

Wall Street, and particularly the big technology companies, have dominated markets over the past five years.

“But as economies re-open, and investors look beyond growth companies, such as the tech stocks, and Wall Street, there are plenty of opportunities emerging.”

Financials, auto manufacturers and green stocks are attractive opportunities in Europe, Wild says.

“I would say banks where there’s strong momentum at the moment,” he says. “I would say autos because they will recover from the semi-conductor chip shortage.

“And I would say green stocks that have been left in the cold this year somewhat. That includes green energy, building efficiency plays and areas geared into electric vehicles.”

Europe has been a relatively unrewarding market to invest in since the Global Financial Crisis.

“Earnings are still 15 per cent below 2008 and much of that is to do with the loss of earnings within the banking sector. So, it’s very important for Europe that the bank sector gets on the front foot.”

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Apart from the banking sector, Europe has underperformed because of lower economic growth and lower earnings growth.

“But earnings for Europe are forecast to grow faster than pretty much any other major area over the next year,” Wild says.

“Europe has underperformed the US so far this year, but from a GDP and earnings view, on a relative basis, Europe is starting to look like the place to be. The question for the US is how long can the technology sector outperform.”

Wild says while European equities look attractive relative to Wall Street, valuations are unequivocally high.

“So, then you look at bond markets. In the US you have seen a recent slight flattening in the yield curve but this may be premature.

“Markets have priced in more increases in short-term rates and long-term rates have come down just a little.

“Inflation is high at the moment, and it does look like it will stay higher. Fortunately for Europe the ECB will be slower than most at raising rates.”

Wild says because of the yield curve, and the fact that the European earnings season has beaten expectations, he is less bearish on Euro equities than he might otherwise be, given valuations.

“The demand side of the equation is still strong. Some of the areas suffering at the moment because of semi-conductor chip shortages will improve. For example, the size of the backlog for auto companies is huge.

“People have savings, employment prospects in general are pretty good and corporates are under-levered.

“In the short term, while it’s hard to see big upside in markets from here, there will relative outperformance and that will come down to style, sector and thematic.”

About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here