Yesterday’s post generated quite a bit of traffic, but nothing in terms of comments, which is a bit unusual. Interestingly, TMM’s post also did not appear to have many comments, which is unusual. I’m not sure what to make of that – maybe people have already made up their minds or maybe there is a lot of uncertainty still.
Anyway, I wanted to talk a bit today about European equities, proxied by the Eurostoxx 50 index. As most readers are probably aware, European equities performed quite well in 2012, marginally beating the S&P 500 in local price terms. Much of this has been driven by expectations of a bounce in earnings as the Eurozone gradually exits recession. On a forward basis, the index is actually trading at the richest level since early 2010. It appears that the market is expecting a somewhat ‘normal’ post recession bounce in earnings here, essentially pricing in expectations of much higher earnings > 1 year out.
There is something missing, however. Historically, index prices lead consensus earnings expectations by between 3-6 months. That’s roughly inline with conventional thinking, and the chart below confirms:
Here’s the rub. By those conventions, earnings expectations should be turning by now. But they haven’t. In fact, they are still going down. The 3m change in 1y forward earnings estimates has been negative, and the momentum is getting worse:
Now, analysts could certainly be slow in revising their estimates here. But the macro data does not support the idea that they are wrong. The Eurozone Manufacturing PMI (blue) has been below 50 for almost a year and a half now, and the 4Q uptick appears to be stalling.
In conclusion – this divergence between prices and estimates isn’t enough to say anything definitive. But the timer is ticking. One of them will need to change direction, and soon.
- Earnings season starts tonight with Alcoa.
- The press reported that Japan will use part of its foreign exchange reserves to purchase ESM bonds. The first round of purchases is likely to take place today. Finance minister Taro Aso told reporters that along with ESM bonds, other euro-denominated government bonds are to be considered as key investment vehicles in the management of Japan’s FX reserves. The purchase amount is currently undecided.
- Wed: Canada Housing Starts
- Thu: BoE, ECB, Initial Jobless Claims, Japan Current Account
- Fri: Japan Eco Watchers Survey,