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WisdomTree: Where Is Earnings Growth in the Eurozone?

There are several reasons to be optimistic about the prospects for Eurozone equity markets: market multiples are low, bond yields are low (and even negative out to 10-year maturities in Germany) and earnings trends are looking more positive……..


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That last item is especially important. Simply looking at the earnings for broad market indices like the MSCI EMU Index may give a distorted view of what is happening across a number of sectors in Europe. Looking at the earnings figures for the MSCI EMU Index, one can see earnings declining over the last five years at a rate of -2.1% per year.

But half the sectors in the market (typically the export-oriented sectors) are delivering earnings growth that ranges from 2.6% per year to 4.5% per year and on average is 3.7% per year. These export-oriented sectors are Consumer Discretionary, Industrials, Health Care, Information Technology, and Consumer Staples. These sectors constitute roughly 57% of the weight of the MSCI EMU Index.

On the other hand, there are sectors (the other 43% of the MSCI EMU Index) in which earnings have collapsed: Financials, Energy, Materials, Utilities, and Telecommunications. The Financials sector was the biggest of these from a weighting perspective.

Earnings Growth Sectors versus Earnings Contracting Sectors
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Focusing on Eurozone Earnings Growth

The WisdomTree Europe Hedged Equity Index (“Eurozone Exporters”), which is composed of multinationals within the Eurozone, is achieving earnings growth largely because it is under-weight these predominantly domestic sectors. These sectors are exposed to a more challenged earnings environment whilst the index is tilted towards sectors where. earnings have been growing in the Eurozone. Compared to the 57% of the MSCI EMU Index allocated to those sectors with positive earnings growth, the WisdomTree Europe Hedged Equity Index currently has 72% allocated to these sectors. Notably, the index is underweight in Energy and Financials and this has helped introduce a quality bias to the portfolio.

For those who believe valuations are low in the Eurozone, the large capitalisation multinationals with an export tilt represent one segment of the market with a better earnings growth environment. This strategy is currently represented by the WisdomTree Europe Hedged Equity Index.
 
Tilting Toward Positive Earnings Growth Sectors
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The sector tilt of the Eurozone exporters, with its focus on positive earnings growth and above average sales growth is apparent on both a one year and three-year time horizon. Compared to MSCI EMU, the WisdomTree strategy is usefully positioned to focus on a higher quality sector mix and stronger fundamentals.

Sales Growth: 1 Year Earnings Per Share Growth: 1 Year Sales Growth: 3 Year Earnings Per Share Growth: 3 Year  
 
MSCI EMU 5.6% 13.4% 1.9% 10.0%  
Eurozone Exporters 10.1% 14.8% 4.7% 10.3%  

Source: Bloomberg as of 28/9/16. Past performance is not indicative results. You cannot invest directly in an index.

 

Source: ETFWorld.fr