LONDON (Reuters) – Investors will be hunting for companies that can rein in costs, preserve cash and avoid amassing big inventories during the coronavirus crisis as Europe Inc. prepares to report the steepest profit fall since the 2008 global financial meltdown.
Companies in the pan-European STOXX 600 index are expected to release figures showing a 22% plunge in first quarter earnings, Refinitiv data show, after estimates at the start of the year had initially forecast a 10.5% rise.
Amid deepening uncertainty for the global economy, many European firms have scrapped their outlooks. The Refinitiv data based on analyst forecasts show earnings down 34.2% in the second quarter and 25.5% in the third.
“Fasten your seatbelt,” said Emmanuel Cau, head of European equity strategy at Barclays. “The final numbers will likely be worse as the global economy has come to a standstill, which might not be fully factored into consensus.”
Barclays and Citi expect a 40% to 50% slide in profits and dividends by the end of the year.
Yet, market moves suggest some risks have been put to one side. The STOXX 600 has bounced 22% from lows in mid-March, when the virus was spreading fast in Europe and lockdowns were being put in place, although the index is still down 26% this year.
“I suspect that after the bounce we had in the market in the past couple of weeks we could see a reality check with earnings forcing the market to focus more on fundamentals,” Cau said.
As companies report dire first quarter figures, investors will scrutinise balance sheets and comments by executives on their plans for restructuring or for any temporary or permanent layoffs to see how well firms can cope with what some analysts say could be the deepest recession since World War II.
Investors will be asking whether cost cuts are realistic, looking for signs of life in April sales and checking the size of inventories, said Maximilian Anderl, head of Concentrated Alpha Equity at UBS Asset Management.
Headline numbers won’t move share prices, he said, “because I think investors like us just see through this and we don’t go for goodwill, we go for free cash-flow generation.”
Investors would be watching for “anything that gives you the feeling that the company is still growing slowly and we are going through this,” he added.
It marks a dramatic reversal for corporate Europe, which had expected a recovery at the start of 2020 as the fog of uncertainty began lifting over Britain’s departure from the European Union and a U.S.-Chinese trade dispute started to cool down.
But, instead of working to boost profits, most companies have scrapped existing plans and some are struggling to survive.
“The big question is whether investors will get outlooks from companies in order to navigate the equity market as expectations are important for valuation and thus future returns,” said Peter Garnry, head of equity strategy, Saxo Bank.
Graphic – Virus lockdowns lead to sharp earnings downgrades: here
ASML (ASML.AS), among the first few blue chips to report, said it could not issue a formal full-year outlook, and Volkswagen (VOWG_p.DE) withdrew its outlook for 2020 after reporting an 81% drop in first-quarter operating profit.
Swiss bank Credit Suisse (CSGN.S), Apple component supplier STMicroelectronics (STM.PA), Sanofi (SASY.PA) and Volvo (VOLVb.ST) are some of the major companies expected to report in the week starting April 20.
Cyclical sectors, such as airlines, restaurants, pub operators, cruise ship operators and other leisure firms, will be hit hardest as governments tell people to stay home.
Estimated global airline losses from the coronavirus pandemic have climbed to $314 billion, data from the International Air Transport Association showed.
But airline stocks have steadied with the help of state aid. Shares in easyJet (EZJ.L) climbed this week after the firm said it had enough cash reserves to survive a nine-month shutdown.
Others are still being hammered. Energy firms are grappling with oil prices LCOc1 at less than half the level they were at the end of 2019, while carmakers are struggling to find buyers for their vehicles.
Financial stocks in the euro zone have underperformed other sectors on worries about a spike in bad loans.
U.S. banks kicked off the earnings season, with JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) reporting sharp drops in profits after setting aside billions of dollars to protect them from potential loan defaults.
Anderl at UBS said state stimulus packages had stabilised economies for now, but another wave of shutdowns in autumn, if the coronavirus outbreak accelerated again, remained a threat.
“That would mean this is dragging on further,” he said.
Graphic – Global earnings forecasts start falling, but still too high: here