European companies limp out of recession

Profits at Europe’s listed companies are recovering from the recession at a slower pace than during any business cycle since 1970.

“We are due some profit growth in Europe,” said Karen Olney, head of European thematic strategy at UBS in London, “but all the negative forces are coming together in one final crescendo before we move into recovery.”

The fourth-quarter earnings season in Europe, which will peak today, has so far revealed little evidence of the region’s nascent recovery feeding through into companies’ results.

“Europe is limping out of recession,” said Graham Secker, head of pan-European equity strategy at Morgan Stanley. “So far in quarter four earnings, zero companies are surprising positively and it is an unusually protracted recovery.”

Earnings at Europe’s biggest companies by market capitalisation, measured by the MSCI Europe index, fell to their lowest point in this business cycle at the end of 2009. Although they started to recover in 2010, earnings fell back again as the euro zone crisis took hold in 2011 and 2012.

The lag between the recovery in earnings at US companies and European companies is also unusually long. “We normally travel a similar path to the US with an eight- to 12- month delay,” said Ms Olney.

Not only is the recovery in earnings unusually lengthy, but the gap between Europe and the US coming out of recession is over three times bigger than it has averaged at this stage in previous cycles.

US earnings are now 20 per cent above their peak in 2007, while European earnings are 26 per cent below.

Analysts suggested better domestic demand in the US and positive bank lending to corporates explained this difference.

Ms Olney expects lending to companies to pick up in the next two to three quarters and for performance to improve as a result. – Copyright The Financial Times Limited 2014