Global earnings are in fine fettle and event risk could be the only cloud

Recent international macro and micro newsflow has been positive, providing a conducive backdrop for global equities, including India, especially for companies with global linkages.

For Indian equity investors it is clearly a relief as corporate earnings increasingly show pressure points emanating from the GST rollout.

Robust US corporate results – impressive topline growth

US’ Q2 2017 corporate earnings season is drawing to a close, as more than 84 percent of S&P 500 companies have already reported their numbers. About 70 percent of S&P 500 companies (long term average: 54 percent) reported a sales beat with IT and materials sectors faring better. In general, cyclicals have led the growth with financials and energy contributing to highest aggregate sales surprise. On the back of this, aggregate sales estimates for the S&P 500 companies have improved for both CY 2017 and CY 2018.

Charts: S&P 500 revenue growth estimates change from June end



Improved sales from sectors having higher international exposure

In general, sectors with improved sales numbers are companies with higher international sales exposure implying improving demand trends elsewhere in the world. In fact, in the previous market cycles, outperformance of commodities in general and metals and mining sector in particular have gone hand-in-hand with the outperformance of emerging markets.

Chart: S&P 500 geographic revenue breakdown


Q2 poised for double digit earnings growth

Compared to expectations, 72 percent of the S&P 500 companies fared well, which is a bit lower than the long-term average of 77 percent but higher than recent quarters. On a year-on-year basis, earnings growth is in lower double digits. If this momentum holds for the entire season, this will be the first time that markets will witness two consecutive quarters of double digit earnings growth since Q4 2011. Energy sector has been the biggest contributor of growth along with Semiconductor (IT) and Insurance (Financials).

Overall, the takeaways from the US earnings season are positive. Excluding energy sector, where expectations were elevated, S&P 500 companies (in aggregate) have witnessed an improvement in both earnings and sales estimates for CY 2017 and CY 2018.

US domestic money flows to international markets

In the post earning conference calls, there are now increasingly fewer references to Trump’s administration/policies. To some extent, the enthusiasm of corporates and financial markets is in check. Interestingly, mutual funds’ outflow from US equity markets continues with almost a balance inflow from the passive money flow (ETFs), which is about USD 99 billion year-to-date.

However, US domestic fund flows for both ETFs and mutual funds tracking international markets are on the rise. Year-to-date, according to EPFR database, about USD 130 billion has been invested in international markets indicating that local investors are finding value in non-US markets.

Europe: Another quarter of improving earnings

In case of eurozone, earnings results for the 83 percent of the STOXX 600 companies, which have reported, have been broadly positive with about 60 percent beat observed at both topline and bottomline numbers. Higher sales surprise was seen for the oil & gas, financial services and insurance sectors. That said, earnings revisions at the index level are broadly flat as improving fundamentals are offset by the adverse impact of the appreciating euro.

Leading indicators point to growth

Leading indicators like PMI readings for the United States, Eurozone, Russia and China were well above the threshold of 50 and underlined the robust expectations on factory orders. For Japan, it moderated, and weakness was seen in some Asian countries – India (largely GST-related), Korea, and Indonesia. Overall global manufacturing PMI (JPMorgan) remained solidly in an expansion phase at 52.7.

Hard economic data is largely supportive…

USA’s July non-farm payroll was solid at 209k payroll gains, higher than expectations. Lower unemployment rate (4.3 percent) and improving wage growth provided another reassuring data point for the Federal Reserve.

Across the Atlantic, eurozone GDP growth of 2.1 percent in Q2 2017, was seen as the fastest growth rate since 2011, indicating recovery in the continent, far stronger than in neighbour Britain.

Closer to home, in China, recent trade data was weaker than expected with exports at 7.2 percent (vs 10.9 percent expected) and imports at 11.0 percent (vs 16.6 percent expected). Though there was some pick-up towards the end of Q2 2017, Chinese trade data nevertheless needs to be closely monitored as it remains a crucial gauge for world trade.

Having said that, China’s continuing efforts to reduce capacity in metals and mining space and a recent improvement in FX reserve data are positive.

…but a lean period for fundamental data exposes markets to event risk

Overall, both global macro and micro environment provide a conducive backdrop for Indian companies having global linkages. However, in the absence of any major central bank meeting or major fixtures on the global earnings calendar, market sentiment can be more vulnerable to a possible escalation in the North Korea-US stand-off, China’s border antics, Middle-East crises etc. Investors, of course, should stay cautious when the going looks so smooth.


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