Fund managers turn pessimistic on earnings expectation

Survey for Aug found only a third of investors think corporate profit will improve over 12 months

In what could spell trouble for equity market, corporate earnings outlook has shown sharp deterioration, says a survey of fund managers conducted by Bank of America Merrill Lynch (BAML).

The survey for the month of August found that only a third of investors think corporate profit will improve over the next 12 months. The reading is lowest since November 2015 and down eight percentage points since last month and 25 percentage points from January.

“Investors’ expectations of corporate profits have taken an ominous turn this year, which is a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones. Further deterioration is likely to cause risk-off trades,” said Michael Hartnett, chief investment strategist, BAML.

The respondents saying equity markets are overvalued rose to a record high level of 46 per cent in August.

The 200 investors surveyed, for a second month, cited policy mistake by the US Federal Reserve or the European Central Bank and a crash in global bond markets as the top two biggest tail risks to the market.

The survey also showed average cash levels in many global portfolios continued to remain high at 4.9 per cent, compared to the 10-year average of 4.5 per cent. Most investors don’t see much of an impact of the US Fed balance sheet reduction in 2017. Only 31 per cent respondents think any decrease would be a risk-off event, pushing bond yields higher and equities lower.

Expectations dim back home 

The weak June quarter (1QFY18) earnings by domestic companies has “set the tone for another weak year”, said Kotak Institutional Equities in a note.

“1QFY18 results suggest that the underlying conditions in several sectors and the broader economy continue to be weak. 1QFY18 net profits of the Nifty-50 Index declined 8.4 per cent year-on-year, 1.8 per cent lower versus expectations. We now expect FY2018 net profits of the Nifty-50 Index to grow 1.5 per cent. In the context of persistent disappointment in earnings, we find the market’s faith in valuations and the Street’s ability to value stocks on FY2019/20 earnings remarkable,” said the note.

After 4QFY17, the consensus earnings growth estimate for Nifty companies was around 18 per cent.

Key findings of the survey

• Average cash balance high at 4.9% globally, above 10-year average of 4.5%

• Net 33% of investors think corporate profits will improve over the next 12 months, down 25ppt from January

• Investors cite policy mistake by the Fed/ECB and a crash in global bonds as two biggest tail risks

• The impact of the Fed balance sheet reduction in 2017 will be a non-event, say 48% of investors

• Net 46% of respondents – a record high – say equity markets are overvalued