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Patrick Moonen, ING Investment Management

Eurozone’s earnings set to outstrip US from this year

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2015 will be the first year since 2007 that Eurozone earnings will outgrow those in the US, according to NN Investment Partners (NNIP).

NNIP says that while US second quarter earnings seasons is slightly ahead of expectations, with around 70 per cent of companies delivering above expectations, it anticipates earnings growth will remain below average for several years.
 
Reasons for this include:
 
• Profit margins: These are close to the peak levels seen in 2007 when revenues expanded faster than wages and the US Dollar was more of a tailwind than a headwind. Today, with the labour market strengthening, it is likely there will be some upward pressure on wages (although this is not visible yet)
 
• Further dollar strength: Given the Fed will likely start to hike interest rates in Q4, this may lead to further dollar strength, which will hamper exports
 
• Position in the earnings cycle: Currently, earnings are more than 20 per cent above the long-term trend. This has happened before but a return to the mean has always occurred implying below trend growth going forward
 
Patrick Moonen (pictured), Senior Strategist, Multi Asset, NN Investment Partners, says: “The situation is very different for Eurozone earnings compared with the US.
 
“First, we do expect a decent second quarter earnings season in Europe. This is because of an improving macro backdrop, whereby the peripheral countries will do particularly well; the positive impact of the weakening Euro; and the high operational leverage that will allow margins, which have not recovered at all, to improve. The weakness of the labour market should limit any wage increases that are not matched by productivity improvement. As a result, 2015 will be the first year since 2007 that Eurozone earnings will outgrow those of the US.
 
“Second, Eurozone earnings are still close to the trough of the current cycle with actual earnings 20 per cent below trend levels, so the outlook for the next few years also appears to be more positive than in the US.”
 
He said one factor that could cloud the European earnings outlook though is China, a region for which European companies are signalling tough operating conditions, with China’s auto sales and cement consumption having turned particularly negative year on year.

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