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[LONDON] The profit-enhancing falls in the euro and oil prices seen earlier this year are expected to have worked less of their magic on European company earnings in the second quarter.
Earnings season is about to get underway in Europe and estimates point to a 5 per cent rise for firms on the STOXX Europe 600 index, Thomson Reuters estimates show, a slowdown from the first quarter's gain of 11 per cent.
That's far from a disaster: Europe's company profits are still set to rise this year as the European Central Bank buys bonds to spur growth and inflation, while corporate exposure to crisis-ridden Greece is extremely limited.
It also stacks up well against the United States, where earnings are estimated to have fallen 3 per cent in the second quarter as the stronger dollar crimps profits.
But it does underscore that firms' ability to lift profits is limited by currency and commodity fluctuations. "It's going to be much more difficult to generate the kind of earnings growth we saw in the first quarter," said Peter Dixon, equity strategist at Commerzbank.
"We should accept that the Q1 numbers were outliers as companies got some additional boost from a sharply weaker euro and a steep decline in oil prices. Currency and energy price moves were not that supportive in the second quarter and that should get reflected in the earnings numbers."
The euro fell 10 per cent against the dollar in the first quarter, boosting incomes of export-oriented European companies, before rising about 3 per cent in the following three months. Oil dropped nearly 4 per cent from the start of 2015 before surging 15 per cent in the April-June quarter.
European earnings for the year are set to rise 9 per cent, outpacing US earnings growth rates, as the region's improving economic outlook and liquidity conditions boost their bottom lines, analysts said.
The brightest prospects are in Italy, where companies'earnings are seen rising by 40 per cent in the second quarter as an improving economic outlook - shown in recent indicators such as purchasing managers' index (PMI) surveys - lift the earnings profile of domestic firms.
"Sentiment regarding Italy has improved following reforms under the current government," said Klaus Wiener, head of tactical asset allocation at Generali Investments. "The benefits from the ECB's quantitative easing programme are among the strongest in Italy because we see the yields coming down sharply, also for the corporate sector." But analysts are quite negative on the outlook for British firms, whose earnings are expected to sink 20 per cent in the second quarter, according to Reuters estimates.
"We are less positive on the UK because we don't believe that the earnings story is as supportive as it is elsewhere. Earnings are held back by big energy and mining weightings and the domestic currency is not a tailwind," HSBC equity strategist Robert Parkes said.
The second-quarter reporting season is likely to bring further misery for the energy sector, where earnings are forecast to slump 37 per cent due to weaker oil prices. The average price of crude oil was more than 40 per cent lower in the April-June period from a year earlier.
Financials are likely to race ahead of other sectors by a wide margin, however, offsetting the pain caused by the energy sector's deteriorating earnings picture. Companies in the sector are expected to see earnings surge 35 per cent in the second quarter from a year ago, building on similar gains in the first three months of 2015.
"If you analyse the lending data, you will see a clear pick-up in the lending activities of banks, despite Greek jitters," Coutts global equity strategist James Butterfill said. "The European Central Bank's quantitative easing operations have certainly helped banks and you will see a continued improvement in their earnings going forward."
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