The second quarter earnings season highlights the growing importance of currency movements to the relative performance between regions globally, NN Investment Partners says.
In all regions NN IP observed that actual earnings beat expectations. However, when looking at the breadth of the surprises, the US and Japan did better than the Eurozone. The percentage of companies beating estimates was 77% in the US versus only 57% in the Eurozone.
Patrick Moonen, Principal Strategist Multi Asset, NN IP, commented: “The second quarter earnings season makes clear that currency movements will become an important variable going forwards in the relative earnings performance between regions.
“Looking at estimates for next year, earnings momentum (upgrades versus downgrades) has turned negative in the Eurozone at -0.09 and has fallen below that of the US at +0.03 for the first time in a year.
“One of the possible explanations of the relatively modest figures for Eurozone companies is the strength of the Euro, which means that sales realized abroad translate into fewer Euros. Currencies are crucial to the relative earnings momentum and are currently a tailwind for US companies and a growing headwind for Eurozone companies.
“However, the Eurozone’s domestic economy is growing faster than originally expected and this should buffer the negative impact of the strong Euro somewhat.”
NN IP notes that the market consensus estimates indicate a superior growth for US earnings of 11.7% versus 9.3% for the Eurozone next year, while the expectation for Japan in the financial year to March 2019 is 7.1%. The gap has increased in recent months and NN IP believes this most likely reflects currency moves.