According to HSBC Global Research’s March 25th Equity Insights, European equities are set to go on a tear while the stronger dollar is likely to pressure U.S. stock earnings and valuations. The HSBC analysts reiterate their 2015 earnings growth forecast for Europe ex-UK at 25% (and possibly as high as 30%) and cut back on their U.S. forecast from 8% to 5%.
Peter Sullivan and the HSBC team lay out their thesis for a major move up in European earnings: “The three big swing factors affecting earnings in Europe ex UK are currency, consumer spending and oil. The key reason for our above-consensus forecast is euro weakness, which alone could boost earnings growth by 20 percentage points according to our FX team’s latest forecasts.”
European earnings improvement will lead to significant valuation boost
The HSBC report emphasizes that they are overweight Europe ex-UK and underweight the U.S. largely due to the strength of earnings growth they expect in Europe.
By the same token, valuations are more attractive for Europe ex UK than for the U.S.. Earnings growth has been much stronger in the U.S. than in Europe for the last two years, so that’s where the money has flowed.
Sullivan et al. say that’s all about to change. “However, the tide is now turning. We expect earnings growth in Europe ex UK to outstrip US earnings this year. As we have explained, we expect 25% earnings growth for Europe ex UK and only 5% for the US. We believe that when this earnings gap begins to close there is a good prospect that the valuation gap will also close.”
Many analysts have made this same rather obvious analysis, but it is not yet reflected in consensus forecasts. That said, the HSBC analysts say they are seeing the first signs that consensus may be changing with upward European earnings revisions starting to pick up. Sullivan and team note: “If we are correct that the consensus growth forecast for 2015 is going to rise from 10% to near 25% then we could be in for the biggest upgrade cycle in Europe since consensus records began.”
Euro-USD rate likely to stabilize through 2016
Of note, the HSBC currency strategy team has recently revised their view on the USD. The new projections are for EUR-USD at 1.05 at end-2015 and 1.10 at end-2016. HSBC is now essentially calling for a stabilization of the EUR-USD exchange rate “around current levels”, meaning the end of the dollar bull run which has seen the U.S. dollar appreciate by 30% versus the euro over the last 10 months.