11 min read 7 Nov 19
Summary: It’s earnings season again, and results are in. In this month’s video, Investment specialist, Kirsty Clark looks at how companies have been faring. With deteriorating economic indicators and a fragile global growth backdrop, who have been the biggest winners and losers?
UK mid-cap stocks led the gains, with the FTSE 250 up more than 5% in October. As the UK prepares for a general election, Parliament has hit the pause button on Brexit; at least for now, ‘no deal’ has been taken off the table.
Sterling also strengthened against the US dollar after the Prime Minister struck an unexpected deal with the EU during the month. However, the forthcoming general election may introduce further currency volatility from here.
Japanese equities also had a strong run in October on hopes of a ‘partial’ US-China trade deal, and as investors bought back into some recently beaten down semiconductor names. US equities were among the laggards during the month but remain the strongest performers year to date.
In commodities, gold was on this rise again after losing steam in September, while Brent crude tracked lower over the month. Italian and German 10-year government bonds also logged gains in October, while US 10-year treasuries were marginally down.
The US Fed announced its widely-expected quarter percentage point rate cut – for the third consecutive time this year. However, Fed Chair Jay Powell struck a more neutral tone on any future cuts. The committee will be keeping a close eye on the data and said it would ‘assess the appropriate path’ for rates as we move forward. Eight other countries including Australia, Brazil, Russia and Turkey also cut rates during the month.
In Europe, following Mario Draghi’s liquidity boost last month, the ECB chose to leave rates on hold as Christine Lagarde takes the helm in November. The Bank of Japan also kept rates on hold but tweaked its forward guidance, hinting at future rate cuts.
So how have companies been faring amid the global economic uncertainty?
It’s reporting season again and, at the time of filming, nearly two-thirds of US companies had reported, and slightly less in Europe, at just under 60%.
As we headed into earnings season, markets had been concerned about how a stronger dollar and the ongoing US-China trade dispute might impact US company earnings, and how resilient firms with higher international revenue streams would be versus those with greater domestic exposure.
Unsurprisingly, the data suggests that companies with greater international exposure have been hit the hardest. Researchers have divided reporting companies in the S&P500 Index into two groups – firms that generate more than 50% of sales domestically, and those with greater global exposure that generate less than 50% of their sales from the US – and they found that aggregate earnings and revenue growth for companies with greater international exposure undershot their more domestically-focused counterparts by 8.3% and 6.6% respectively.
In aggregate though, US earnings have, so far, been surprising to the upside, calming investors’ concerns about slowing global growth and the ongoing US-China trade war.
Around 80% of US companies, across a broad range of sectors, beat earnings estimates, and the majority have delivered better-than-expected revenue growth.
In Europe, while negative earnings expectations offer a low base, nearly 60% of companies have delivered positive earnings surprises.
IT and healthcare companies delivered the some of the strongest earnings beats, both in the US and Europe.
Interestingly, European equity investors have been less forgiving than US equity investors, of companies undershooting earnings expectations – with European consumer staples names hurt the most on the back of poorer earnings results.
However, the positive market reaction in Europe to companies delivering better-than-expected results was also much stronger than in the US – with a 1-day relative median market reaction of 2.5% versus 1.3% in the US. European industrials benefited the most from earnings beats.
The magnitude of both positive and negative price reactions in Europe is also much stronger than the average we’ve witnessed over the past couple of years, perhaps indicative of the uncertainty facing investors.
While third-quarter earnings have so far come in better-than-feared, there are some concerns that earnings expectations for next year, certainly in the US, may be too optimistic, given the fragile global growth backdrop and deteriorating lead indicators.
While global manufacturing data, in particular, has been weakening – in line with the slowdown in global trade – wider indicators are showing a relatively resilient US economy, at least for now…but, as we head into an election year, it won’t just be the US Fed keeping an eye on the data.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.