How’s earnings growth looking across the main European stock markets?

Fairly positive, at least according to bullish equity analysts at Morgan Stanley.

In sum, we are on course for another headline earnings per share beat in Europe they argue.

Here are the highlights….

“62% of companies have beaten EPS estimates by 5% or more, while 17% have missed, giving a strong ‘net beat’ of 45% of companies. This is a very strong outcome and puts 4Q20 on track to deliver the broadest beat on data back to 2007. Weighted earnings have so far come in 20% ahead of consensus with the median stock beating by 10% too. Banks have been a key source of net beats, with 82% of the sector beating so far.”

Profit margins also look like they are expanding as well.

It’s notable that the breadth of sales beats has so far been much narrower than that of EPS, with a net 12% of companies beating sales estimates. As was the case last quarter, this suggests a beat on margins, which we see as a key theme for the 2021 recovery story. “

And, perhaps unsurprisingly, it looks like the best numbers are coming from more value oriented stocks….

“Earnings revisions are positive at the market level, with Financials and Commodities sectors still seeing the best EPS revisions and defensives currently seeing the worst. Upside EPS surprises have also been more pronounced for Value stocks this quarter with the median Value stock so far beating EPS estimates by 27%, compared to 10% for Growth”

Value in the UK – “trade of the decade”

Sticking with that idea of rebounding value stocks in Europe, analysts at Research Affiliates are – not unsurprisingly given their fundamentals-based viewpoint – on the lookout for value opportunities. Their top target is Europe and especially the UK which they think is the TRADE OF THE DECADE!

You can read their latest analysis “ How COVID-19 Vaccines and Brexit Create the Trade of the 2020s “ by Rob Arnott,  Vitali Kalesnik, and Lillian Wu HERE.

Around the globe, value is trading at extremely deep discounts relative to growth. The discounts are wide no matter how we measure valuation. While we still like our last-named trade of the decade, emerging markets value stocks, the UK equity market, and UK value stocks in particular, are now even cheaper. With the final Brexit deal done and the rapid COVID vaccination rate in the United Kingdom, the outlook for UK value is extremely promising, enough for a “trade of the decade.

I agree. UK value stocks are dirt cheap.

Last but by no means least, those of us worried by inflation trends tend to fixate on measures such as the 10 year US government bond yield. If they start increasing because of fears about higher inflation, we tend to start worrying about another bout of taper tantrums.

Cue equity sell-offs.

But maybe that relationship does not quite work as we expected.

The chart below is from equity analysts at Deutsche in the US. It shows that US 10 year yields have indeed started rising. But more and more money is flowing INTO equities – not flowing out of equities. The bank’s analysts note that during the last big taper tantrum “equity funds enjoy inflows of over $300bn over the following 12 months, previously the best stretch of equity inflows over the past decade. Equity flows are also supported by strong macro data surprises and growth, and in our view a peak in growth, and not rates, holds the key for when equity inflows will turn”.