* 2016 poised to see European earnings contract again
* Europe Inc's earnings down in 4 of the past 5 years
* Financials, Brexit worries weigh on profits
* Oil, autos, EM-related companies relative bright spots
* European EPS through the years: reut.rs/2553txN
By Kit Rees
LONDON, Oct 14 Europe Inc's unimpressive
performance on earnings over the last five years is expected to
continue at least until the end of 2016 as worries over banks
and the impact of the Brexit vote weigh on corporate profits.
But there may be bright spots - oil producers, car makers
and companies exposed to emerging markets could all deliver
relatively upbeat third-quarter results over the coming month,
according to analysts and investors.
Persistent disappointment on corporate earnings growth has
dented the appetite for stocks among investors around the world,
who have pulled money from European equity funds for a record 36
Meanwhile earnings in aggregate have contracted for four of
the last five years in Europe and are expected to contract 2
percent this year and this compares with expectations of a 0.4
percent contraction for S&P 500 companies, according to
Thomson Reuters I/B/E/S Estimates.
For 2017 European earnings are expected to increase by 13
percent, reflecting a tendency for analysts to take an
optimistic view which diminishes as the year proceeds.
Financials, along with commodities-related sectors, are
expected to be the biggest setback for earnings overall.
Europe's worst-performing sector, banks have pulled
the STOXX 600 Europe index down 6.7 percent so far this
"The banking sector is probably going to take the most focus
and that's going to be driven by things like litigation costs,
mostly," Olly Russ, manager of the Liontrust European Income
European banks, whose profitability has been battered by
relentlessly low interest rates, have been in focus in recent
weeks with Deutsche Bank shares hitting record lows
and continued worries about Italian lenders' bad debts also
Meanwhile, concerns about how British firms will fare as the
country negotiates its way out of the European Union have
dampened earnings expectations at the more domestically-exposed
A spate of profit warnings from the likes of Capita,
Mitie, easyJet and Sports Direct have
already started to show some of the concerns over the impact of
The struggling pound, however, has improved the outlook for
large, globally focused but UK-listed oil producers,
pharmaceutical firms and food and beverage companies which earn
significant revenues abroad and the 11 percent rise in the FTSE
100 index since the Brexit vote on June 23 has taken it
to record highs.
Firming commodities prices, on the back of stabilising
growth in China and emerging markets, have also lifted the mood
for mining and metals companies while upbeat German ZEW and Ifo
surveys have shown an improvement in both business and economic
sentiment in Europe's biggest economy.
The modestly improving global backdrop coupled with
commodity prices on the cusp of turning positive year-on-year
could see third-quarter earnings beat estimates, Morgan
Stanley's European equity strategists said in a note.
Analysts are particularly hopeful for some robust results
from Europe's automotive sector after September's stronger sales
in China, the world's largest car market.
Likewise oil majors could benefit from a lift in oil prices,
which have risen to above $50 a barrel since OPEC said it had
made a deal to cut output in September.
"After five years of earnings declines, we think that we are
finally approaching the end of Europe's earnings bear-market,"
analysts at Morgan Stanley said, though warning that stocks are
more vulnerable to disappointments following the recent rally.
Morgan Stanley estimates aggregate third-quarter earnings in
Europe should contract 4 percent, though with commodity and
financial firms stripped out, profits would rise 13.6 percent.
Looking to next year, analysts currently expect European
earnings to grow more than 13 percent, an optimistic projection
according to some investors.
"That just isn't achievable. It would be a struggle to
achieve it in a good economic environment, let alone this
environment," said Veronika Pechlaner, European equity fund
manager at Ashburton, adding that third-quarter results could
help take the market down to more healthy levels and reset
"As people consider the outlook for next year, it could be
helpful if the market starts to shave off some of these
optimistic numbers for next year," said Pechlaner.
(Additional reporting by Alistair Smout; Editing by Nigel
Stephenson, Greg Mahlich)