European stock markets facing headwinds

As European stock markets fail to pick up despite one worry after another getting knocked down, analysts adjust their expectations towards a more bearish stance.

Tests by the European Central Bank on banks in the eurozone did not reveal any horrible surprises although some observers said they missed important risk factors.

The FTSE All Share is down by more than 2% over one year and by nearly 3% year-to-date. The FTSE 100 of the most liquid shares fell even more, by 5.4% over the past year and by 5.3% year-to-date.

Germany’s DAX is flat year-on-year but down by 5.3% since the beginning of 2014. France’s CAC-40 fell by 3.6% over the past year and by 3% since the start of this year.

Legal & General Investment Management cut its earnings growth projections for European companies for this quarter by 2%.

European stock markets and earnings outlook

European stock markets likely to suffer as earnings outlook is cut. Source: Legal & General

Eurozone companies’ earnings growth at the end of this year is likely to be around 8%, compared with Legal & General Investment Management’s previous estimate of 10%.

While this does not look like a big cut, “in a lower growth environment where earnings growth has been struggling to gain traction it is a significant adjustment,” Lars Kreckel, global equity strategist at Legal & General Investment Management, said in a statement announcing the cut.

“Perhaps the most important implication is that we no longer expect European earnings to materially outgrow those in other regions like the US.”

The share of revenues that companies in the eurozone generate in the European Union has fallen from almost 80% in the 1990s to about 60% nowadays.

But the region remains an important contributor to companies’ profits, and renewed economic weakness was behind the adjustment in earnings estimates.

“The volatility genie is back out of the bottle,” Chris Tinker, co-founder of Libra Investment Services, said in a recent update on the markets.

A return to the complacency of the past three quarters, when volatility was low and any dip was immediately bought by investors looking for a way in, is unlikely.

Libra’s proprietary measure of volatility, calculated on the basis of fair value, has jumped.

The jump is “potentially more permanent than the ‘spike’ we saw in the Vix,” with Libra’s proprietary measure of volatility testing levels seen in October 2012, and remaining on an upward path.

“Simply put – returns will be hard to come by,” Tinker warned.

@AntoniaOprita