Brace for more reduction in earnings forecasts in the near-term18 July, 2012, 1:36. Posted by Zarathustra
Earlier, we noted the extremely challenging earnings outlook for Hong Kong/China companies as record number of companies issue profit warnings.
On a related note, Goldman Sachs expects that the although market consensus on first half corporate profits has been reduced for Chinese companies, there is still a good possibility that the first half earnings are going to be disappointing as macro indicators continues to look weak and analysts have been slow to revise their earnings expectations downward.
The following chart is interesting: it shows that analysts are relatively slow in revising down their earnings forecasts for Chinese companies compared with the pace of downward revision of China’s GDP forecasts, thus Goldman Sachs are expecting even more downward revisions to earning forecasts in the months ahead, although they believe that it might have been priced in.
Source: Goldman Sachs
Outside of China, earnings outlook appears to have darkened somewhat in Asia. Goldman Sachs suggested earlier of the week cut the EPS forecast for MSCEI Asia Pacific ex. Japan for 2012 and 2013, citing poorer economic outlook. As sell-side analysts are slow in revising earnings downward, Goldman Sachs believed that the downward revision cycle will continue.
1. We expect soft 2Q results in the upcoming reporting season. Consensus expectation for 2Q earnings is down 10% yoy, and we continue to expect downstream commodities and China retail to disappoint. Banks in China, Indonesia, and Thailand could have small beats. We also highlight 10 and 13 stocks as positive and negative surprise candidates, respectively. We also show in the Appendix the results calendar by markets and sectors, as well as the reporting dates of the top 5 constituents in each industry.
2. Looking into full-year 2012 earnings, we expect further downside to the current consensus earnings estimates. Our analysis suggests that overall revisions could remain negative even if we enter the “recovery phase” of our GLI cycle, although earnings sentiment might trough and some sectors like consumers might start to see upgrades.
In Europe, Barclays Capital points to the following chart, which shows the German IFO institute survey compared with European analysts upgrades/downgrades. As you can see, they track each other reasonably well. The recent slump in IFO survey might well point to further downward pressure on earnings forecasts.
Source: Barclays Capital