Indeed, also UBS Investment Research published a note on European Earnings Momentum last week
Stocks – Earnings disbelief!
Earnings are at the centre of focus and while results are better than expected (on a net basis) Large Traders in US stock futures are concentrated short as of last Tuesday. This appears to illustrate that the more active investors (hedge funds) hold a disbelief in a continued recovery in earnings (and the economy) in spite of the constructive market message from an increasing number of global stock indices breaking into new recovery highs lead by emerging markets and technology. Again we draw your attention to the historical fact that there is little relation between a recovery in companies’ profits and real GDP during the first year out of a recession! Consequently, we maintain that market evidence still advocates that “risk” appears to be on the upside rather than on the downside… contrary to what was commonly assumed at the end of June. Plunges below the early July reaction lows are necessary to cancel prospects of more gains ahead of us!
Bonds – Why should I have long duration?
To many market pundits’ surprise the global recovery continues – not least influenced by strong company earnings. Now, with a lot of evidence in support that we have passed the bottom of the global financial business cycle, a continued recovery in stocks, commodities and cyclical currencies and a continued hefty bond supply why should I hold long bonds/duration? This appears the thought of investors and yields are again rising towards the highs in June when officials stepped in to assure investors about their hesitance when to start executing “exit plans”. Within the short-term a further challenge of the June yield highs appears likely as asset allocators continue to direct funds towards more cyclical risk markets. However, this should not blind us to the fact that real bonds yields are soaring with inflation so benign and central bankers having informed us (in June) that they will not commit the Japanese mistake of the -90ies. Undoubtedly, this will lure long term institutional bond investors when benchmark yields approach the June highs. Therefore, we maintain that the yield direction within overall ranges will be guided by the two transient investment themes: 1) “supply fear and economic recovery” and 2) “real yields and central bank responses to protect a fragile global macro economy”.
Commodities – Short squeeze in copper
Speculators have been stubbornly short positioned in copper during the 2009 recovery, but interestingly an exit from short futures positions appear to have commenced. Therefore, with emerging markets still showing strength and industrial metals outperforming precious metals we believe that caution remains warranted about any calls for important recovery peaks in global commodities.
Currencies – A weak USD perception is spreading
Prospects of soaring health care expenditure and higher minimum wages are only encouraging US funds being allocated abroad and more foreign investors hedging their USD exposure. Clearly, the major investment themes among currencies centre on: 1) “the US dollar collapse theory”… currently only weakly tempered by 2) “US business cycle well ahead of Europe and the euro challenged by its first real recession”. Now, the US dollar market action and continued evidence of a global recovery still suggest to us that more USD weakness is ahead; this not least seen versus a soaring SEK (major technical top formation evident in EUR/SEK). Finally, we hold on to our carry basket (BRL, RUB, TRY vs. CHF, CAD).
Earnings momentum continued to be negative in July, but only just. We are close to seeing now as many upgrades as downgrades. The three-month average improved for a third consecutive month and is now at its highest level since June 2008. For one-and-a-half years we have been more bearish on the European earnings outlook than the bottom-up consensus numbers. Back in September 2008 when Lehmans failed and the US economy was already in recession (the ISM manufacturing survey was at 43.4 in September, with anything below 50 signalling a contraction), consensus was forecasting flat earnings growth in 2008 and a 13% rebound in 2009. Since then, consensus expectations for the level of 2009 earnings has halved with many sectors falling by much more. We believe we are getting close to downgrades ending with consensus currently estimating earnings to fall 22% this year. From a top-down perspective, we forecast a 25% fall in 2009 and 15% growth in 2010. We believe the market will look to the current earnings season for direction, as we believe we are moving back to an environment where performance and earnings momentum re-connects. Chart 1 highlights the historical correlation between the sectors’ earnings momentum and performance. At the recent market low and in 2003, the correlation turned negative (i.e. buy the downgrades and sell the upgrades), but now we are returning to a more normalised environment with the three-month correlation currently at 0.11 ... , having been 0.00 last month.Here is also the excerpt from sector overview (my emphasis):
This month we extend our sector breakdown to 30 sectors by splitting materials andIf I look at the components of DJ EuroStoxx 50 index, then the year-to-date (YTD) performance is led by names like Deutsche Bank (+87% YTD) , BNP Paribas (+72% YTD), Banco Santander (+45% YTD), UniCredit (+31% YTD), among others, versus the index itself just 6.7% YTD.
food/beverages/tobacco into their components. General retail, banks (both retail and investment banks) and beverages have seen net upgrades relative to the market, and have outperformed, as correlation returns to positive territory. Telecoms, media and tech hardware have been among the worst performing sectors, and seen net downgrades relative to the market.
One reads, for example, the research note by BNP Paribas on German banks, and should be wondering about "optical illusions in banking figures".