As at the start of 2012 and 2013, sell side analysts are again betting on a material growth in corporate earnings (+14.5% expected ex financials), and as in 2012 and 2013, they will be again proven wrong.

The overall macroeconomic environment, though better, is not supportive enough for that type of growth expectations. The only two bright spots are the US (where the fiscal drag will be much less pronounced next year) and the UK, a surprise to many.

Spain and Italy have seen the worst and may rebound, but their contribution to overall growth on the continent, will be offset by France where the need to implement austerity measures delayed for too long and the worst political/social context in many years may force the country back into recession.  

Germany could exert a powerful reflationary force in the Euro zone, especially on the back of two years of strong wage inflation, but they remained structurally addicted to exports and we are yet to see a material pick up in consumer demand.

Emerging markets will need at least two more quarters to digest the consequences of the FX crisis they met with in 2013. China is no longer the growth El Dorado that it had been for many European companies. That much is clear when discussing with companies as diverse as Swatch (watches), Hugo Boss (apparel), Remy Cointreau (spirits), Volvo (construction equipment), Schindler (lifts).

In conclusion, 2014 will probably prove better for European corporate earnings than the last two years to the point that they will most likely grow, but the pace of this growth cannot match overall expectations.

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Lionel Rayon

Lionel joined Schroders as part of the acquisition of Cazenove Capital in the summer of 2013, having been at Cazenove since 2005. He is a senior member of the pan-European equity team and manager of the Schroder ISF* European Alpha Absolute Return (circa $1 Billion AuM). He is also responsible for developing and maintaining a fundamental and valuation screen of European stocks. The screen forms the basis for generating ideas for potential further detailed investigation by the European team within the framework of their disciplined Business Cycle Approach. Lionel joined from Citigroup where he was a Director in the European Tech Research Team. Prior to Citigroup, Lionel had been with Schroders Securities, as a French specialist, Nomura Research Institute, as a metals & mining specialist, Enskilda and Chevreux de Virieu. Lionel graduated from Indiana University (MBA) and Institut d'Etudes Politiques de Paris (BSc economics & finance). He has 20 years of equity research experience.

Website: www.schroders.com


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