May 3, 2019 / 6:01 AM / 23 days ago

RPT-ANALYSIS-Half-time: Europe Inc scores to avert Q1 disaster, hopes of a rebound rise

 (Repeats story for wider distribution, no changes to text)
    * Industrials shine with 5 percent positive surprise
    * Companies cite China as a positive rather than a negative
    * Technology and healthcare also showing strength
    * Companies point to second half rebound

    By Helen Reid and Thyagaraju Adinarayan
    LONDON, May 2 (Reuters) - European investors breathed a sigh
of relief as more than half the region's major companies
reported first-quarter earnings above market expectations, even
if the bar was set very low ahead of results season,
underscoring hopes the worst is behind Europe Inc.
    As the mid-way mark of the Q1 reporting season approaches,
companies' stronger performance and the diminishing mentions of
risks related to China and a global trade war are encouraging
    Make no mistake: European earnings overall are still
predicted to shrink by 4.2 percent from a year ago, the worst
showing since the third quarter of 2016.
    But numbers for the pan-European STOXX 600 companies have
been better than feared: some 58 percent of them beat
expectations, compared to a long-term average of 50 percent and
tracking its best quarter in two years, Refinitiv data showed. 
    Industrials, a sector very closely geared to European and
global economic growth, have been a success with earnings
delivering a 5 percent surprise. 
    The sector is also one of the furthest along in reporting
with more than 40 percent of companies' results through.
    The data also showed Swedish truck maker Volvo,
engineering group Alfa Laval and Airbus
topped the charts in terms of positive surprises, while
Lufthansa had the biggest negative surprise.
    That spells a much stronger performance than dire
manufacturing data would suggest. Euro zone factory activity
contracted for a third month in April.
    Technology and healthcare also contributed to a higher
number of beats in the March quarter, although only about a
dozen companies from each of those sectors have reported so far.
    SAP, Europe's biggest tech company, reported
robust results and raised its outlook, helping the shares soar
12.5 percent.
    A stellar sales increase at Sanofi's rare diseases
Genzyme unit boosted the French drug maker's shares.

    With "short European equities" cited as the most crowded
trade globally for two consecutive months in Bank of America
Merrill Lynch's (BAML) fund manager survey, it's clear many
investors think negativity on the region may be close to a peak.
    "Consensus suggests the region is significantly challenged,
but it has performed better than many realise," said Graham
Secker, head of European equity strategy at Morgan Stanley.
    Europe's STOXX 600 has outperformed even the main
emerging markets benchmark year-to-date.
    But this may not be reason enough to rejoice just yet.
    It is a reflection, partly, of companies in Europe becoming
more savvy with their guidance and managing expectations ahead
of results. 
    Investors have thus been cautious about extrapolating this
to a stronger underlying economy. There has however been a
marked shift in the pressure points for companies. 
    China was mentioned as a positive driver much more than a
negative, according to BAML strategists, a sign massive stimulus
in the world's second biggest economy may have had an impact.
    Luxury group LVMH said demand had picked up in
mainland China, boosting its first-quarter sales and driving its
shares up nearly 5 percent to a record high.
    Britain's pending exit from the European Union and the
U.S.-China trade war were also blamed less often for poor
    Another area of improvement has been the frequency of cuts
to profit forecasts: so far this quarter has seen the fewest
profit warnings at the start of earnings season in a year. 
    "The number of profit warnings (so far) is well below that
of the past earnings seasons, which should be seen as a positive
development," said Stephane Ekolo, an equity strategist at
    Companies across sectors have guided investors to a stronger
second half.
    Earnings growth expectations, having already fallen
significantly, should stabilise at this level, said Emmanuel
Cau, head of European equity strategy at Barclays. 
    "The bulk of the EPS downgrades is behind us and (we) expect
earnings momentum to improve as we move into H2," he said.
    After a blistering start to the year for global stocks,
investors are finding it hard to make head or tail of a rally
that caught many by surprise as they recovered from a harsh
sell-off late last year.
    Mixed economic signals do not help paint a clearer picture.
    Stronger earnings from industrial companies fly in the face
of data points like euro zone industry sentiment, which fell for
a fifth consecutive month in March and was well below market
    But better reports from the companies most sensitive to
growth could be an early sign of a pick-up in activity.
    "The recession might have been priced out but the recovery
has not yet been priced in," said Andrew Milligan, head of
global strategy at Aberdeen Standard Investments. 
    Still, Milligan stopped short of outright positivity on
Europe, saying the possibility of an escalation in a trade
dispute with the United States is part of his decision to stick
with a neutral position in his global portfolio.
    Politics aside, the holy grail for investors in Europe
remains economic improvement - and that could still be a while
    "Is Europe going to be a top pick? Only if we start to see
some very definite signs that the European economy is turning
and turning up very sizeably. We're just not seeing that," added
 (Reporting by Helen Reid and Thyagaraju Adinarayan, Editing by
Josephine Mason and Frances Kerry)
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