30 October 2020

Fresh lockdowns, old earnings downgrades

‘Wave II’ of Covid-19 has triggered ‘Lockdown II’ in France and Germany with Spain already at a standstill and the UK not far from capitulating too.

This looks likely to lead to a fresh wave of earnings trimming and a reversal of rosier expectations post a brilliant first 2 weeks of earnings results.

These Q3 earnings with “beats” ringing across trading rooms at morning meeting calls are odd in at least three respects: 1) few corporates commit to FY2020 anyway unless it is a repeat of earlier cautious guidance, 2) the beats are massive which leads one to conclude that hand holding of analysts by corporates IRs has been less active than before while the speed of the Q3 volume recovery has come as a surprise to everyone; 3) they share a feature which is that any business with Chinese exposure and/or an e-commerce side to it did correspondingly very well.

We have revisited our 2020 and 2021 earnings dynamic which has been stubbornly somber since last February with 2020 earnings down 41% and up 48% for 2021, give or take +/- 5% in communicating vases between the 2 years.

As usual, % changes are useless to describe the real world. Below are the hard(er) facts: further erosion and phenomenal opportunity costs. In a word, the 2021 earnings at pixel time are still 13% down on 2019 (€510bn vs. €589bn).

Truth in hard figures: earnings still heading south

The phenomenal opportunity cost is about how we contemplated 2021 a year ago vs. now: €728bn in earnings (AlphaValue coverage) vs. €510bn now. Those €218bn missing are worth c. €3 300bn or a third of the market cap before Covid became a common name. The dividend component of that opportunity cost is c. €100bn which is worth €2,800bn to €3,500bn depending on what one regards as a normal yield.

Further erosion is really about reinterpreting more carefully what looks like a bottoming out of earnings downgrades for 2021. 2021 earnings have been trimmed by €-218bn over a year, by €-11bn over 6 months and gained €14bn over the last 3 months. Before reaching for the Alleluia Trumpets, it pays to mention that the 3 month revision of 2021 earnings is still a €-4bn downgrade once Banks are excluded.

Indeed Banks are benefiting from lower loan loss provisions than we had been expecting both in 2020 and 2021, thanks to the helpful hands of central banks providing liquidity to all, directly or indirectly. Other sectors are still being trimmed once the Banks ‘contribution’ is set aside.

And that was before ‘Lockdown Mark II’. The odds are that trimming 2021 will continue and Banks will play along the same sombre hymn. Sorry.