Macro in Europe and results

August 11, 2022

Office Buildings in Financial District La Defense, Paris, France

Equities have rallied since the low point in June but several headwinds remain, including a slower economic outlook, tightened financial conditions, and the end of the reopening dynamics coupled with an uncertain gas supply in Europe.

Here are some thoughts regarding the European economic landscape and fundamentals behind companies having reported their half year financial results:

  • The majority of European companies have reported their first half results. The levels of earnings beats remains very high. Indeed, the magnitudes of these beats have hit a new records. So far, 69% of companies in STOXX 600 index have reported revenues beating consensus while 17% missed. The revenue beat/miss ratio for this European index reached 4.0x at the end of July versus the 5-year average of 1.7x, according to BNP Paribas Exane Research’s Strategy on August 5, 2022.
  • Amongst other things, European companies have benefited from the reopening of the economy and a weak Euro. Companies that generate a significant portion of their sales in U.S. dollar have experienced a positive translation effect on their top line. Looking at the performance by geographies, sales generated in North America outperformed while sales in China, Northern and Eastern Europe underperformed.
  • Consumer sentiment deteriorates; with real disposable income falling, non-essential purchases like apparel may be impacted. This creates the risk of oversupply and possibly the need for general retailers to offer significant discounts to clear up inventory. Companies like Gap and Walmart have seen an increase in promotional activities. On the other hand, companies exposed to the service side of the economy continues to experience strong consumer demand. Travel and lodging remains a priority.

Resurgence of political risk; the resignation of Italy’s Prime Minister Draghi adds uncertainty to the future fiscal path of Italy and may contribute to higher spreads. The election planned for September 25 will hopefully provide more clarity on the sustainability of the Italian public finances.

Global Alpha Capital Management Ltd.
August 11th, 2022