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Big rebound in corporate earnings foreseen as pandemic shock eases

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The pandemic has yet to ease but optimism in markets over corporate earnings is nearly unbounded. According to equity analysts, we should look forward to the biggest rally in global corporate earnings since 2003. Unfortunately, equity analysts are usually wrong.

The consensus predicts 50 per cent growth in earnings per share in Europe and 22 per cent in the US for next year, with the double-digit recovery extending into 2022 as laggards such as the financial and travel industries catch up. Recovery hopes are underpinned by expected global expansion in global domestic product next year of more than 5 per cent, the best since the 1970s, with central banks too fearful to withdraw support for stricken economies.

The third-quarter results season gave a hint of how corporate sales and margins will recover as vaccines roll out and economies unlock.

HSBC analysis found that 57 per cent of companies globally beat EPS expectations for the third quarter, slightly above the long-term average of 51 per cent. But it was the scale of the beats that impressed: by 22 per cent and 16 per cent for the US and Europe, respectively. Consumer goods, industrials, healthcare and technology were the star sectors, particularly in the US but also in Europe. For emerging markets, only the oil and gas companies stood out as regular consensus beaters.

Just as important, according to HSBC, were the outlook hints given during earnings calls. Its language analysis of more than 74,000 earnings transcripts suggested executives had turned most bullish relative to where they were three months ago among the technology, basic materials and industrials sectors. Only the consumer goods companies and financials remained gloomy.

However, with the Stoxx Europe 600 index already up more than 14 per cent for November, markets are already reflecting a lot of boardroom optimism. Valuations are now nudging 19 times 12-month forward earnings, well above the average since 2014 of 14.6 times, yet longer-term nominal growth prospects remain low, Goldman Sachs says.

Goldman’s global gross domestic product growth forecast for 2021 is about a percentage point above the consensus at 6 cent. However, the bank says that even if the recovery’s strength surprises and equities can hold on to much of their great reset premium, the market peaks seen in February are still unlikely to be bettered.

Earnings revisions are another complication. In recent weeks they have been going in the opposite direction to stocks, with investors choosing to ignore the present and peer through the fog. In the eurozone the picture for EPS estimates has been deteriorating for 10 straight weeks, according to JPMorgan Cazenove data.

The improving earnings picture has been driven almost exclusively by the US market, where the balance of EPS revisions has been in positive territory since June. For Europe, EPS downgrades have exceeded upgrades for every week of 2020.

A turnround in Europe looks challenged in the near term given November’s imposition of new lockdown measures. Few doubt the coming earnings rebound; when and from what base are the key unknowns.

Do markets offer any clue to the shape of the coming recovery? Not many. Market froth when measured by earnings expectations belies an awkward truth that forecasts are lowered for companies to beat. Equity analysts are notoriously over-optimistic and guilty of correcting their mistakes ahead of time.

For each of the past 19 years they have assumed the sum of corporate earnings would grow, which proved wrong four times for the US and nine times for Europe, JPMorgan analysis finds. Predictive powers have also been waning. Since the onset of the financial crisis in 2008, according to JPMorgan, start-of-year estimates have overshot reality 13 times for Europe and 11 times for the US.

Equity markets typically ignore over-exuberance on the sell side, as demonstrated by long-run average annual gains of around 10 per cent while EPS projections fell between 7 and 9 per cent. But markets have never before had to plot their way through the aftermath of a global pandemic. Nor has any current chief executive. A post-Covid-19 rebound looks a sure thing, but the odds have been lengthening that it can match recent exuberance.

bryce.elder@ft.com



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UK ends damaging post-Brexit clash over status of EU envoy

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UK foreign secretary Dominic Raab has finally ended a corrosive diplomatic dispute over the status of the EU’s ambassador in London, a stand-off that had added to post-Brexit tensions.

Raab had previously refused to grant João Vale de Almeida full diplomatic status after Brexit took effect on January 1, arguing the EU was an “international organisation” not a state.

Brussels retaliated by shutting Britain’s head of mission to the EU, Lindsay Croisdale-Appleby, out of key meetings with EU officials, adding to Brexit tensions on trade and Northern Ireland.

But on Wednesday the issue was settled after a meeting between Raab and Josep Borrell, the bloc’s foreign policy chief.

Officials briefed on the deal said Vale de Almeida would now receive the same diplomatic recognition as his counterparts in EU missions in all other world capitals, including Washington and Beijing.

In a joint statement, issued at a G7 meeting in London, Raab and Borrell said they had reached an agreement based on “goodwill and pragmatism” on an establishment agreement for the EU delegation to the UK.

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While Vale de Almeida will enjoy full ambassadorial status, British officials said Raab had secured a deal “which gives us some of what we want” regarding the legal situation of EU staff in London.

EU officials will enjoy a largely similar status to other diplomats but with some downgrades: notably, under the agreement, they will not have immunity from prosecution for road traffic accidents.

Raab insisted on this carve-out following the death of Harry Dunn, a British motorcyclist killed in 2019 in a collision with a vehicle driven by Anne Sacoolas, the wife of a US diplomat. She returned to the US claiming diplomatic immunity. 

But many British diplomats were dismayed at how long it had taken to resolve the dispute. “It was a stupid thing to do in the first place and we’ve had to back down,” said one former ambassador.

The diplomatic rapprochement was hailed in Brussels as a sign of a “new cycle” in UK-EU relations following the European parliament’s formal ratification last month of the trade deal between the two sides, which took effect on January 1.

There has also been a thawing in relations over the management of tensions in Northern Ireland, as London and Brussels look for ways to soften border checks on goods coming from the British mainland to the region.

Vale de Almeida will now get to present his diplomatic credentials to the Queen — an honour not available to the heads of international missions.

Boris Johnson has never recognised the EU as equivalent in status to a national government but Number 10 insiders insisted that the Foreign Office — not the prime minister — was responsible for the diplomatic dispute.

Meanwhile, Ireland and the UK announced plans for the first meeting in two years of the British-Irish Intergovernmental Conference, a structure created under the 1998 Good Friday Agreement for the two countries to liaise on issues around Northern Ireland. 

“We are aware that there are sincerely held concerns in different communities in Northern Ireland in relation to a number of issues and firmly agree that the best way forward is through dialogue and engagement,” said Northern Ireland secretary Brandon Lewis and Ireland’s foreign affairs minister Simon Coveney in a joint statement after they met in Dublin on Wednesday afternoon.

The meeting will take place in June, ahead of the July marching season in Northern Ireland, which could inflame tensions between unionists — who feel that their region’s status in the UK is under threat from post-Brexit trading arrangements — and nationalists, who are pushing for a vote on a united Ireland. 

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France threatens to cut power to Jersey as fishing tensions rise

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France has threatened to cut off its power supply to Jersey in the Channel Islands, as tensions rise with the UK over the post-Brexit fishing regime.

Following the UK’s full departure from the bloc in January, French fishermen have expressed concerns at difficulties in receiving the necessary licences to fish in British waters.

The dispute also comes at a time when UK and EU negotiators are in discussions over the 2021 catch quota for shared fishing stocks.

Jersey, the largest channel island and a British crown dependency, receives 95 per cent of its electricity from France through underwater cables. Its foreign policy is governed by the UK, which means it is treated as a third country by the EU.

Annick Girardin, the French maritime minister, told France’s National Assembly she was “revolted” that Jersey had granted 41 fishing licences that included conditions and specific criteria that were “decided unilaterally and without explanation”.

“It’s unacceptable,” she told lawmakers. “We’re ready to resort to retaliatory measures . . . concerning Jersey, I’ll remind you of the transport of electricity via submarine cables.” Girardin added she would “regret” any action but “we’ll do it if we have to”.

French fishermen and ministers have been complaining for two weeks about the difficulty of gaining access to British waters despite the agreement on fisheries reached at the end of last year.

The anger among French fishermen at the delays in receiving licences for fishing in UK has prompted barricades for lorries arriving in Europe with UK-landed fish.

Clement Beaune, France’s junior minister for European Affairs, last week threatened to block regulations that would allow UK financial firms to do business in the EU if Britain does not respect its Brexit commitments on fishing.

Bertrand Sorre, an MP for President Emmanuel Macron’s governing La République en Marche party, gave the example of a fisherman from Granville in Normandy who had previously fished for scallops and whelks for an average of 40 days a year off Jersey; he had been told he could fish for only 11 days this year, and only for scallops.

Ian Gorst, Jersey’s external relations minister, said it had issued the licences in accordance with the UK’s trade and co-operation agreement with the EU and the new regime would “take time for all to adjust”.

“If French fishermen or the authorities have further evidence they would like to submit, we will update the licences to reflect that evidence,” he said in a statement.

The UK’s Department for Environment, Food and Rural Affairs said: “We are clear that Jersey is responsible for its own territorial waters.”

UK business minister Nadhim Zahawi urged both sides to “iron out” issues with fishing. “We’ve got to look at this urgently and the best way to fix this is to work together,” he told Sky News.

A senior UK official said the government had been taken aback by the strength of the French reaction, which was seen as an “aggressive escalation” given that the UK had been working together on the question of licensing. “It’s a strange way to behave, from what is meant to be a friendly country,” they added.



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Hello, Berlin? Germany’s future raises foreign policy concerns for allies

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The writer is Fritz Stern chair at the Brookings Institution

President Joe Biden has made it clear that he really, really wants to work with Europe. After the four traumatic years of the Trump presidency, that seems an opportunity not to be missed. Also, Moscow and Beijing are undeterred by US and EU sanctions over the jailing of Russian dissident Alexei Navalny and the mistreatment of Uyghurs in China.

They are dialling up the pressure on Europe with countersanctions, expulsions of diplomats and thuggish-sounding threats. But in Brussels, EU Commission president Ursula von der Leyen is fighting with European Council president Charles Michel over charges of sexism and a Turkish sofa, instead of getting a grip on a double-dip recession and the pandemic.

British premier Boris Johnson is in trouble over costly wallpaper. French president Emmanuel Macron, up for re-election in 2022, is neck-and-neck in the polls with his far-right rival Marine Le Pen, while retired and current military officers are warning of civil war.

This would seem to be the moment for Germany, as a responsible neighbour, to step up and help out. But Europe’s most powerful economy is going to the polls even sooner than France: on September 26. As the 16-year tenure of Chancellor Angela Merkel comes to a close, the six parties scrambling to rule in the post-Merkel era are somewhat less than focused on goings-on beyond Germany’s borders.

The reason is the fragmentation of Germany’s colour-coded party landscape. In current polling, the Greens are fighting for first place with the CDU (black) at about 25 per cent, with the Social Democrats (red) far behind at 15 per cent, followed by the liberal Free Democrats (yellow) and the Left party (dark red) at around 11 per cent each.

The far-right Alternative for Germany is so radical that Germany’s domestic intelligence service wants to place it under observation. No other party will work with it, but it still captures about a tenth of the vote. This increases the likelihood that Germany’s next government will be a three-way coalition, with a kaleidoscope of possible combinations: black-green (or the reverse, with the CDU as junior partner); “Jamaica” (CDU-Greens-liberals); “traffic light” (Greens-SPD-liberals); and finally, “R2G” (SPD-Left-Greens).

This is why the small parties’ ideas suddenly matter. But in terms of foreign and security policy, none of the five presents a fully reassuring image to a neighbour or ally of Germany.

The Left party’s only path to government is R2G, a goal the powerful leftwings in the Greens and the SPD have been actively pursuing. But the Left too has radicalised, shedding its once influential east German pragmatists. Its new top duo opposes military engagement abroad of any kind. But it is also apparently clueless about pensions, and that may alienate its base.

The FDP has cabinet-ready experts on finance, digital issues and foreign and security policy — and a liability in Christian Lindner, their leader. The CDU and Greens are still smarting because of his petulant walkout from coalition negotiations in 2017. Last year, he faced a revolt in his own party after supporting the decision of a regional liberal politician to let himself be elected state governor with the AfD’s help.

The SPD’s Olaf Scholz is caught in a double bind. As Merkel’s finance minister, the opposition accuses him of oversight failures in a spate of financial scandals. As candidate for chancellor, he has seen the SPD leadership wrench the party to the left with anti-nuclear slogans reminiscent of the 1980s. Fritz Felgentreu, one of several seasoned legislators to resign in protest, calls his party’s security policy a “smouldering fire”.

Armin Laschet, the CDU candidate, has come under fire for sounding soft on Syria, Russia and China. Yet his real problems are corruption scandals and circling party frenemies. His party may be dealt another blow in next month’s state elections in Saxony-Anhalt, where some polls have the AfD in close pursuit.

All this does much to explain the rise of the Greens and Annalena Baerbock, their laser-focused candidate. Her criticism of China, the Kremlin and the Nord Stream 2 pipeline project is music to Washington’s ears. Yet the party’s feisty base has had ferocious fights over defence spending and nuclear deterrence. Its reliability as a partner is by no means guaranteed.

Of course, elections are generally not fought, or won, on foreign policy. But German voters would do well to remember that their country’s wealth and power depends on the stability and security of its neighbourhood. Maybe it is time to pay attention, and get a little worried. Its neighbours and allies already are.



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