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Picture: 123RF/perfectpixelshunter
Picture: 123RF/perfectpixelshunter

London — European companies are getting punished harder for earnings misses than at any time in at least 16 years as investors grow increasingly unforgiving in the face of soaring global interest rates, war in the Middle East and a murky economic outlook.

This week has seen shares in a raft of blue-chip companies get slammed, not just for missing forecasts, but even for excessive optimism given how weak the outlook for growth is.

French payments company Worldline lost 70% in value in a day after cutting its full-year targets without much explanation, while drugmaker Sanofi lost 15% on Friday after dropping its 2025 targets. Barclays, a big UK lender, fell as much as 8% after signalling major cost cuts because of weakness on its home turf.

European companies that missed earnings per share expectations this reporting season have seen their share prices fall by an average of 6.18% in the five days after reporting, vs a 2.04% average gain for those that beat them, according to Morgan Stanley.

In the five days after results, shares are tending to drop after a miss by far more than they tend to gain after a beat. In fact, according to Morgan Stanley, this divergence is at its highest since 2007.

“The market forgives nothing at this time,” Angelo Meda, a portfolio manager at Banor SIM in Milan, said.

“[It includes] Worldline cutting its cash flow estimates without giving a real reason, Campari coming out below expectations without explaining where that comes from, Siemens Energy having to ask for a state guarantee, Volkswagen and Volvo Cars giving messages that are clearly too optimistic given the macro picture.”

Huge punishments

Mark Denham, head of European equities at Carmignac, said high-quality companies with high valuations tend to be very vulnerable if they miss earnings.

“We are seeing huge punishments on stocks. We have especially noticed this in the healthcare sector, and subsector life science tool and services,” he said.

The scale of the selling has also been huge. Almost as much volume traded in Worldline shares in one day as in the whole of the last month, according to LSEG data. Barclays, meanwhile, saw three times as much volume on the day of its results as the daily average of the past five years.

Some of this vulnerability is coming from tighter credit conditions. Global bond yields have soared in the past 18 months as central banks have jacked up rates, but equities have held up, creating an asymmetry, Denham said.

That the global economy has been surprisingly resilient despite soaring interest rates — at least until now — has underpinned equities. According to Kasper Elmgreen, CIO at Nordea Asset Management, that the economy is now starting to slow is one factor behind investors’ harsh treatment of earnings disappointments.

“In individual companies there is some nervousness about where these cracks are going to show,” Elmgreen said.

Market players are scouring companies’ balance sheets for weaknesses that have been hidden by the unexpectedly robust economy as well as remnants of bulky Covid-19-era order backlogs that are now starting to be run down.

Buying opportunity

“We are starting to see the impact [of higher rates] on business models, on companies that are more long-duration where maybe they spent a lot of capex in a low-inflation scenario and the increase in rates is making those investments less profitable than discounted before,” said Fabio Di Giansante, portfolio manager of Amundi Funds Euroland Equity.

Amid the volatility, some investors see a buying opportunity in overly punished stocks.

Carmignac’s Denham pointed to Swiss contract drug manufacturer Lonza, which fell 16.1% on October 17 after cutting its 2024 margin target, as an example of a stock being harshly punished for negative news. The stock is down 43% in the past six months.

“Having taken that hit we are still holding the name, we believe in the core business, which is manufacturing biologic drugs on behalf of pharma companies. It is an example of a highly valued stock being extra punished for the environment,” Denham said. 

Reuters

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