- Q3 earnings season off to an uninspiring start
- Investors most focused on revenue surprise and outlook
- China is exceptionally cheap given its long-term prospects
- Structural factors still favour EM over DM
- Downturn in US biotech sector is overdone
A wealth of opportunity awaits in emerging markets in the long term. Photo: iStock
By Peter Garnry
Weakness mars early Q3 earnings
With the median revenue surprise being 0.1% among the 41 companies in the S&P 1200 Global Index that have reported earnings so far, this Q3 earnings season is getting off to a disappointing start. The EPS surprise is 2.6% but investors are currently more focused on revenue surprise and revenue outlook than earnings per se.
With only four earnings results from materials companies and none from energy companies, the downside risk to the Q3 earnings season remains high. JPMorgan Chase Q3 earnings
were weak with net revenue down 6.5% y/y and adjusted net income down 21.7% y/y driven by weak refinancing activity in the mortgage business, the global economic slowdown as well as earnings compression in the global commercial banking segment from low rate environment.
Only the Equities and IB segments held up. JPM results point towards weak US bank earnings as highlighted in our previews. We expect weak earnings from Citigroup reporting Oct 15 (1200 GMT). We continue to believe that the best way to play US financials is through regional banks as they have higher interest rate sensitivity and thus have higher earnings potential when the Fed begins rate normalisation.
Intel reported earnings yesterday
and did actually surprise on revenue and earnings estimates but it cut the outlook because of a weaker global outlook for its Client segment (PCs and mobile) including lower growth rates in its Data Center segment.
China slowing, EM stabilising
Most leading indicators are seeing a bottom except in Brazil where recent PMI figures continue to highlight a distressed economy on a backdrop of low commodity prices and structural issues with low competitiveness.
As we recently highlighted in our Q4 Outlook we believe emerging markets equities represent a fantastic investment opportunity both short and long-term as the valuation discount to developed market equities is historically high. Despite temporary weakness from lower commodity prices the long-term structural factors are still in favour of EM countries over DM. We believe China is exceptionally cheap given its long-term outlook.
Biotech downturn overdone
US biotechnology remains down 25% from its peak in July as attacks on the industry in the media and by politicians have taken investor sentiment lower.
The US Democratic presidential candidate Hillary Clinton has been very vocal about price caps on drugs, but in our view the declines in biotech stocks have been an overreaction as we do not believe there is political will to regulate drug prices.
The long-term case for US biotechnology industry is unchanged with higher growth rates expected compared to the average S&P 500 company and attractive ROIC. Our preferred stocks in the industry are Gilead Sciences and Biogen driven by superior pipeline, strong ROIC and high expected top line growth.
– Edited by Clare MacCarthy
Peter Garnry is head of equity strategy at Saxo Bank