Her Eleftherias Kourtali
The world economy is slowing down. Concerns about stagnant inflation are growing. The Russia-Ukraine conflict has created a negative supply shock, recession and inflation. Citi economists continue to lower their GDP forecasts and raise their inflation forecasts. They expect the Eurozone GDP to grow by 2.3% in 2022, from 3.3% a month ago, while inflation will move in 2022 to 6.5% from 4.6% previously forecast. According to the US Bank, PMIs are likely to follow the path of decline and negative revisions, along with analysts’ earnings per share (EPS) forecasts for listed companies.
Estimates for EPS are too high
Analysts’ consensus forecasts for 2022 currently forecast growth of 9% in EPS for mainland Europe and 10% for the United Kingdom (6% excluding commodities). Citi started this year with more cautious estimates, forecasting a + 5% increase in EPS. This reflects its concerns about weaker growth and higher production costs affecting profit margins.
Citi adjusts its estimates to take into account the new downgraded economic forecasts and concludes that EPS growth in Europe will reach 3% this year alone, well below the + 9% consensus. Indeed, this forecast corresponds to an increase in Eurozone GDP of around 3.5%, well above Citi’s latest forecast of + 2.3%. A 3% increase in EPS would mean that the Eurozone PMIs are approaching 50, not the current 58.
Negative reviews at the gates
The above indicates that analysts will begin to revise their EPS forecasts after more than a year of clear upgrades. Note that downgrades are the rule. In the previous cycle, the analysts’ estimate started with a growth forecast of about + 12% in EPS, but was then revised downwards.
Consensus has already begun to move in that direction, Citi points out. The Citi European Earnings Review Index (ERI), which measures analysts’ EPS upgrades versus downgrades, recorded the second consecutive week of significant negative reviews and is likely to remain in a downtrend area. A negative ERI is not helpful, but not necessarily bad for stock returns. Ultimately, the European ERI was negative for most of 2012-2015, but European stocks rose 57%.
Citi estimates that the stock markets have already moved towards valuing an even more downward outlook than its forecast for 3% EPS growth. This is reflected in the relationship between European stock prices and future EPS. According to this relationship, European stocks have already discounted a stable EPS for 2022.
The most vulnerable EPS are found in the Energy and Telecommunications sectors while the strongest in the raw materials sector. Thus downgrades are inevitable for the cyclical sectors (excluding freight and transport) as well as for the most consumer-sensitive sectors.
The image of Greek shares
In this context, Citi presents the new estimates for Greek shares. Earnings per share are expected to jump 37.9% this year from 37.4% a month ago and before the war in Ukraine (including banks), which is the highest rate in both the eurozone and Europe, as well as in relation to the set of developed and emerging markets. In 2023, an increase of 23.8% (from 20.8% before) in Greek EPS is expected.
Of course, as Citi noted, downgrades are likely to follow in the near future, especially at European level. In any case, the increase in the profitability of Greek listed companies stands out.
By comparison, the profitability of European companies is estimated to increase in 922 by 9%, of emerging markets by 8.3%, of developed countries by 8.9%, and of American companies by 8.3%, while on average internationally the increase of profitability will be 8.8%.
At the same time, at the levels of 3.9% (from 3% before) the estimated dividend yield of Greek shares is above the average in Europe, but above the USA, which is at 3.5% and 1.5 % respectively. In global markets, developed and emerging markets, it is placed at 2.2%, 2.1% and 3% respectively.