No one seems to be positioned for good news in Europe. Forex dynamics convey the same message, with crowded long USD positions contrasting with shorts on GBP and EUR. We note that from an earnings perspective, FX depreciation has come as a silver lining for EU and UK equities, at least offsetting a small part of the drag from weaker growth.
We would argue that European market valuation seems fair as it is already trading near to lows of its long term range, and thus shouldn’t see much more additional pressure from rising real yields, at least in relative terms
Whenever global GDP growth falls below trend (around 3%), we have seen negative EPS growth and margin contraction, both at the MSCI World and European level. Our economist’s estimate for real global GDP growth next year is just 2.2%, so well below trend, which should imply margin erosion and negative EPS growth. Consensus EPS Growth for Europe next year is +2%, but is higher at +9% if we look at the numbers ex-commodities, and has hardly been revised down ytd despite the softening activity data.
Using our economists’ new EA GDP forecast outright (-1.1% for 2023) would give us negative EPS growth in the low-mid teens. However, we make an upward adjustment to the GDP estimate to account for the expected fiscal-energy relief programme. Using -0.5% GDP growth for next year gives an estimate in the high single digits (-8%), which seems more appropriate given the many moving and somewhat offsetting parts, as details on the plan haven’t been announced yet.
- Barclays Equity Strategy
Comments