The undertone of my column this week for Citywire is the old good news, bad news concept. Two steps forward, one step backward. Overall, I’m still fairly bullish about stock markets and equities though I am markedly more cautious in the immediate short term because of the dreaded coronavirus which I think will end up being much more damaging than we all think.
Quickly touching on that grim subject, I thought the chart below is interesting from strategists at DWS asset management. They’ve looked at the last similar experience, SARS, and then looked at the performance of the Hang Seng index which at the time was closest to the epicenter of the disease. The SARs outbreak bottomed out at the end of April, just days before the date at which the reported daily new infections numbers began to decline.
“A comparison with the current coronavirus epidemic shows an almost identical pattern: The low point for many indices was at the end of January, while the number of new infections reported daily peaked on February 5. The markets have thus almost exactly followed the script from 2003.”
Unfortunately, this all assumes that the current viral outbreak fits the same pattern. And that we can trust the numbers coming out of China. Neither of which I agree with. I expect the impact to be much greater and the likely short-term reaction of investors much more damning. Once they get the real numbers.
None of this pessimism should cloud a more short to medium analysis which suggests that the global economy has moved out of its recent slow phase and is/was picking up speed again.
Some evidence for this comes from the latest roundup of the European Q4 earnings season from analysts at Morgan Stanley. Their numbers reveal that earnings are surprising on the upside with 43% of companies beating EPS estimates by 5% or more, while 33% have missed. “If maintained, this implied net beat of 10% would be broadly consistent with the breadth of beats we’ve seen through recent reporting seasons”.
Crucially these earnings beats are much higher quality. According to the analysts at Morgan Stanley “recent quarters have shown a consistent pattern of large downgrades to consensus just ahead of results, followed by earnings beats. However, this quarter has shown a higher quality beat, given the downgrades to consensus numbers were much smaller than usual. In the two months before results season, EPS estimates were in aggregate downgraded by 1.4%, but weighted earnings are currently on track to beat expectations by 5.9%, implying results are a solid beat”.
Overall these numbers imply a return to EPS growth for Europe. “Results currently suggest that weighted earnings are on track to grow by 2.4% year on year in 4Q, much improved on the ~5% contraction averaged in the first three quarters of 2019. This is an impressive result in our opinion given soft comps don’t really come into play for the aggregate index until 1Q20 reporting season.”
And now for the bad news.
This time from equity quant analysts at SocGen. US numbers, they reckon, aren’t looking so good.
They report that
“net income barely moved, with a rise of just 0.3%. More worrying is without the Big 5 companies (Microsoft, Alphabet, Apple, Amazon and Facebook), net income fell 7.5%. In part, this is due to higher costs (SG&A) and a significant rise in both interest expense and taxes. That interest costs are rising so quickly despite low-interest rates is remarkable and a challenge to policymakers. With all this debt, higher interest rates seem no longer feasible.”
“The headline-grabbing figure is share buybacks. We measure buybacks both from the declared amount repurchased to the repurchase figure from the cashflow statement. Typically, the former is bigger than the latter. With 80% of the overall value of buybacks reported so far, buybacks are 20% lower in 2019 than 2018 – excluding the Big 5, the figure is down 32%. “
US reporting so far – annual growth rates for companies in S&P 1500 that have reported figures