Quantifying the European earnings slump

The latest reading landed on Monday from Morgan Stanley’s crystal ball-gazing team, led by Teun Draaisma.

This time it’s Ronan Carr out to put numbers on the forthcoming recession in European earnings. The bottom line is that expectations remain too high.

Morgan Stanley sees a 21 per cent peak to trough slide, starting from the third quarter of last year. And the fall is starting from a lofty peak - they put EPS in real terms at an all-time high for Europe, at 83 per cent above trend.



And that, adds Carr, is the benign scenario.

A downturn in earnings is unavoidable we think with global GDP growth slowing (and the US in recession), earnings and margins at record high levels and warnings signs from several reliable indicators. The downturn in profits may be less than past cycles given capex discipline in recent years, generally solid corporate balance sheets and structurally high growth in emerging markets. Nevertheless, our forecast still implies this would be a miraculously benign recession compared to history (average peak-to-trough fall of 39%), meaning risks are still to the downside.

Their worst case scenario assumptions put the downside at 44 per cent, over 26 months.

So, with the FTSE’s skipping joyfully back over 6,000 on the monolines’ salvation, what happens to our promised bear market rally?

Fear not - the MS team is still predicting a three to six months rally off what they say might have been the cycle lows for the main equity indices. But don’t be deceived. There’s a lot of negative earnings news to come before the bear market’s over.

The next bull market will only start when earnings start to rise again, at some point in 2009. History teaches us that while we may have seen the lows in equities associated with this earnings recession, the next bull market will only start once earnings are close to bottoming out. Markets don’t tend to discount the earnings recovery much in advance. Beyond the near-term rally, we should expect weaker markets again as the earnings downturn bites.

http://ftalphaville.ft.com/blog/2008/02/26/11184/quantifying-the-european-earnings-slump/

 

Expected.

A cold fact: Europe economy is NOT in good health.
Simple to understand unless you are antiamerican.