Banks (subsector of financials): Admittedly, we don’t expect the same level of EPS growth in 2022 after a 40% growth in 2021, with limited headroom for even lower provisions, but believe negative growth is far too pessimistic. Positive drivers include sizeable cost reduction plans, continued fee growth and buybacks being firmly turned on. Rightly, we don’t incorporate any benefit from higher yields yet, despite some stabilisation in net interest income last year. However, we recognise this as a potential source of further upside in the future.
Autos (subsector of consumer discretionary): After a huge recovery in earnings in 2021, analysts are, in comparison, expecting only subdued earnings progress in 2022. Underpinning this is a reluctance to believe OEMs can maintain any pricing discipline. This is despite ongoing supply chain shortages and 2022 volumes assumed to be still 12-13% below 2017 peak! This caution is also evident in analysts not giving the full benefit of the various cost savings plans in place.
Energy is another area, where we believe consensus forecasts are too low. Perhaps, this seems aggressive to some, with double digit growth already factored in. Where could surprises come from? Scrutinising analysts’ expectations, it looks like many expect oil/gas prices to be maintained in H1, but fall away sharply in the second half of 2022, impacting earnings.
To us, this is far from certain. For gas, low inventory levels in Europe will take time to replenish, even more so if there is cold weather during this winter. As for oil, we note that supply has reacted quickly, owing to the climate agenda versus the demand reaction due to take place only over the medium to long term. We continue to expect short-term demand recovery as the pandemic conditions normalise.
Conclusion
Overall, low earnings expectations combined with an attractive valuation entry point, translates into a supportive investment case for European Equities, and particularly for the less favoured sectors and stocks. Our strategies are therefore positioned to not only capture the positive GDP outlook, a key factor in our ‘cyclical value tilt’, but also where we see clear idiosyncratic drivers.
In our view, it’s incompatible to expect such strong economic growth in 2022 whilst forecasting minimal progress in earnings. Even if the Omicron variant turns out worse than we expect, acting as a drag on earnings, you’re still left with an asset class on an attractive valuation with very conservative growth expectations.