Page 42 - DIY Investor Magazine Issue 24

GLOBAL PERSPECTIVES: PAST
THE FIRST INFLECTION POINT IN CONSENSUS EARNINGS ESTIMATES
Alastair George
Chief Investment Strategist
Investors wait for news on the lifting of lockdowns
Across the globe, consensus earnings forecasts for 2020 have fallen by an extraordinary 19% in just a single month to mid-April.
There is no debate now about the potential significance of the disruption caused by the public health control measures implemented to slow the spread of COVID-19. We note however the peak of the downgrades on a global basis was during mid-March and while estimates are still falling, the bulk of the adjustment due to the initial impact of COVID-19 is now behind us.
‘THE BULK OF THE ADJUSTMENT DUE TO THE INITIAL IMPACT OF COVID-19 IS NOW BEHIND US’
Key to any sustained improvement in sentiment will be incoming news on the lifting of lockdowns during this quarter, in addition to continued reductions in daily infection rates. Last week we suggested a modestly overweight position was appropriate in equities.
Given the rapidity of the rebound since then, the list of notably oversold shares has shortened and we would not chase the market now as significant uncertainty remains in respect of the duration of the impact of COVID-19.
Exhibit 1: Consenus catches up to COVID-19: 2020 consensus earnings forecasts
We return our global equity view to neutral.
In mid-February, we observed that consensus earnings forecasts appeared to show near-total complacency amongst analysts in terms of the risks of COVID-19 becoming a pandemic.
In the intervening 2-month period, forecasts have been downgraded by the most since the 2008 global financial crisis.
Continental European earnings have been downgraded and now anticipate a 15% profits decline in 2020, compared to earlier expectations for a 6% rise.
We would caution against reading too much into projected EPS growth at this stage however, and nor should forward P/E valuations be over-emphasised. Consensus forecasts are not designed to capture exceptional losses or non-recurring items.
It is likely in our view that the reported figures for 2020 will be worse than currently indicated, once the full impact of COVID-19 has progressed through company income statements and balance sheets.
Source: Refinitiv, Edison calculations. Unweighted revision index shown.
DIY Investor Magazine | Apr 2020 42