Markets set for rally later in the year

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A FRESH wave of cuts to European company profit forecasts is on its way but will leave firms well placed to outperform later in the year – potentially boosting stock market returns.

By tempering analyst expectations, companies, many of which look attractive against long-term valuations, will be better placed to beat them in the coming quarters. In turn, this could fuel stock market performance after several quarters in which macroeconomic uncertainty has been the main driver.

Consensus earnings growth forecasts for European companies in 2013 have already been cut from more than 12 per cent in October to about 9 per cent, according to Thomson Reuters Datastream.

The number is set to fall further to about 5-6 per cent after the announcement of the latest results and outlooks from more companies, reflecting the slow or negative growth expected in most European economies, analysts said.

But the pace of downgrades is slowing and signs of an (albeit slow) economic recovery, backed by central bank stimulus, means steep cuts seen last year are unlikely to be repeated, analysts said.

According to industry data, the earnings revision ratio for 2013, which measures the percentage of upgrades against downgrades, bottomed in October at 30 per cent upgrades to 70 per cent downgrades, before rising to 36/64 as the pace of downgrades slowed.

“We saw a brutal earnings downgrade cycle last year, but the pace is starting to slow,” HSBC Securities analyst Robert Parkes said.