Glimmers of hope emerging in Europe

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BR ThyssenKrupp Bloomberg An employee kneels on an escalator's steps during assembly at a ThyssenKrupp factory in Hamburg, Germany. Domestic demand in Europe is recovering, boding well for company profits. Photo: Bloomberg

Frankfurt and Paris - Europe’s corporate profits are still eroding but investors are at last starting to see glimmers of hope, with revenues picking up, domestic demand recovering and good news from exposure to the US making up for bad news in emerging markets.

Recent weakness in emerging markets – which hit European multinationals such as Nestlé, Anheuser-Busch InBev and Holcim – could delay the long-awaited European earnings recovery, but probably will not derail it.

European companies have been aggressively reducing costs and cleaning up their balance sheets in the past few years. They are slowly starting to reap the benefits as global growth recovers, driven by the improved momentum in developed countries.

Halfway into Europe’s earnings season, headline numbers are still dire: restructuring costs and currency factors helped drive profits nearly 5 percent lower in the quarter to December last year from the fourth quarter of 2012.

But a pick-up in corporate revenue, up 2.3 percent, is fuelling investors’ hopes that the worst days are over.

Results have been good compared with analyst expectations, with 58 percent of firms reporting profits in line or higher than forecasts, the EU’s best score since the third quarter of 2012, Thomson Reuters StarMine data show.

And surveys of business such as the purchasing managers’ indices (PMIs) are upbeat.

“The European PMIs for January were very good, especially the figures for Germany. There’s no doubt things are getting better in Europe,” said Ollie Beckett, a fund manager at Henderson Global Investors.

“Europe has just been through two or three years of severe cost cutting, so as soon as the European economy picks up a bit, it will spark a big bounce in profits.”

Domestic demand is the key to a recovery. Data showed on Friday the euro zone economy grew 0.3 percent in the fourth quarter of last year.

Companies across the region – including cancer drug maker Roche, telecom major Vodafone and the biggest steel maker ArcelorMittal, recently cited early signs of improvement in Europe which should bolster earnings.

“Europe is still tough but there are a number of lead indicators,” Vodafone finance director Andy Halford said early this month, and ArcelorMittal forecast European steel demand would return to growth this year.

Banks including Spain’s Santander, the euro zone’s biggest lender, France’s Société Générale and Dutch group ING have also reported improved earnings as they shed bad debts and losses they suffered in the global financial crisis.

Even the overall year-on-year fall in profits was not necessarily bad news for investors: much of it was due to one-off restructuring charges, which should leave companies in a better position in the future.

For example, ThyssenKrupp posted a better-than-expected quarterly operating profit on Friday, despite a net loss because of one-off charges related to the sale of a stake in Finnish steel maker Outokump. Big banks like BNP Paribas and Credit Suisse saw profits hit by costly legal settlements, but that removes future litigation risk. - Reuters

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