* Earnings outlook improves, but strong euro a drag
* Firms seen delivering 5-6 pct EPS growth - JPMorgan
* Reporting season unlikely to offer stock-market catalyst
* Strong euro, mixed economic outlook a drag on sentiment
By Atul Prakash
LONDON, July 9 The earnings outlook for European
firms is on the mend, though a spate of profit warnings and some
weak economic indicators mean the second-quarter reporting
season is unlikely to give investors a decisive steer.
After a rough start to the year, the pace of global economic
recovery improved in the second quarter for the United States
and held steady in China. But in Europe, where the euro remains
obstinately strong, business activity slowed in June in
powerhouse Germany and shrank in France.
Economic growth elsewhere should help European companies -
which derive a substantial amount of revenue from outside Europe
- to deliver earnings-per-share growth of approximately 5
percent to 6 percent, according to estimates compiled by
J.P.Morgan for a sample of firms that report quarterly profit.
Pessimism about earnings has ebbed in recent weeks, with the
rate of analyst earnings downgrades slowing down.
However, a persistently strong euro, which is making export
prices less competitive, along with uncertainty about the
strength of the economy in the second half of 2014, make some
investors doubt that European shares will be able to challenge
"The second quarter is going to be better than the first
quarter, but not spectacularly better," said Ronny Claeys,
senior strategist at KBC Asset Management.
"We don't have high expectations because we still have some
major headwinds. The negative currency impact is still there and
the economic recovery has been slow."
An initial raft of European trading updates on Wednesday
pointed to a glum outlook, with U.K. insurer Admiral
reporting a drop in six-month revenue and French caterer Sodexo
cutting growth targets. By contrast, U.S. aluminium
group Alcoa soundly beat analyst forecasts.
European exporters were hit by a first quarter rise in the
euro and got no let-up from currency strength in the second
quarter. The head of planemaker Airbus was the latest
executive to call, on Tuesday, for the European Central Bank to
take extra steps to weaken the currency.
Europe has other problems, too: Air France-KLM and
Lufthansa have warned of lower profits because of
competition and overcapacity, while engineer Bilfinger
blamed the German shift to greener energy.
"I struggle to be optimistic about earnings in Europe,"
Andrea Williams, fund manager at Royal London Asset Management,
said. "My concern is that second-quarter earnings season
disappoints again, especially in the industrial space,
particularly for those companies exposed to the power markets."
Potential winners over coming quarters include
consumer-focused companies linked to the global economic
recovery, such as automakers. Analysts also expect some
defensive utilities like Snam and Gas Natural
to deliver earnings growth.
Conversely, the full-year outlook for telecoms in France,
the United Kingdom and the Netherlands is poor, mainly due on
companies such as Vivendi, Vodafone and KPN
, due to stiff competition and regulatory concerns.
Shares in the firms have fallen 9 to 12 percent in the current
Earnings momentum needs to pick up further in the coming
quarters to provide significant support to European stock
markets, analysts said, with the focus likely to remain on
companies' forward guidance and economic data.
Companies are likely to keep cutting costs and selling
assets, even if this is less crucial than before for earnings.
Although the pan-European FTSEurofirst 300 index
trades near multi-year highs, it has risen less than 5 percent
this year. Britain's FTSE 100 index is almost flat.
Despite the possible lift to earnings from rock-bottom
borrowing rates, few believe this will jolt investors.
"I'm not necessarily looking at this reporting season and
thinking it's going to be the end of the world," Ian Richards,
global head of equities strategy at Exane BNP Paribas, said.
"But I do think that we are unlikely to get a positive
catalyst out of it."
(Additional reporting by Tricia Wright; Editing by Lionel