Given all the sovereign debt concerns in the Eurozone, you’d be excused for missing the massive earnings growth expected from Europe this year. Morgan Stanley is clearly a bull:
A positive growth cycle, however moderate, will delay the timing of the final leg in the secular bear market that started in 2000, we think. The first cyclical bull market within the ongoing secular bear market was 2003-07, the current second cyclical bull market started in March 2009 and should continue until the next earnings recession. Our earnings growth leading indicator (EGLI) points to over 50% earnings growth in the next 12 months, and we expect earnings growth of 35% and 10% in 2010 and 2011 (versus IBES consensus expectations of 33% and 23%, respectively). Equity valuations are reasonable. We prefer equities over fixed income on a 12-18 month view.
In fact, as shown by consensus earnings growth expectations mentioned above, most people are bullish on European profits this year. Morgan Stanley was even forced to tone themselves down, note they weren’t willing to commit their official forecast to the 55% EPS growth that their ‘Earnings Growth Leading Indicator’ model projected.
If their EGLI proves correct, then Europe is in for its best earnings growth year four in decades:
For those concerned about what goes into their model, here it is:
EGLI is a 4-factor regression model that gives a 12-month lead on EPS growth for MSCI Europe. Regression based on data between Jan-72 & Apr-03 for the following 4 macro drivers for earnings – 1) YoY% OECD leading indicator with a 12 month lead (30 countries plus 6 non members – BRICs, Indonesia and South Africa; 2) YoY% IFO business climate survey with a 12 month lead; 3) YoY% commodity prices, based on S&P GSCI commodity index with a 12 month lead (Index weight – 70% energy, 14% agriculture, 8% industrial metals, 5% livestock, 3% Precious metals); 4) Level of global yield curve (bps) with a 24 month lead, based on weighted average 10 year and 3 month government rates (Index weight – 60% US, 40% Europe). Source: MSCI, S&P, IFO, OECD, GSCI, Haver, Datastream, Morgan Stanley Research
(Via Morgan Stanley, European Strategy, 29 March 2010)