המשולש הכלכלי החיובי גובר על הסיכונים העיקריים

In economics at least, risks and threats always make more headlines than opportunities for growth or economic benefits. The strong rise in inflation, the rise in the cost of energy or bottlenecks in global trade, which have led to serious supply problems, are the first serious tensions in reconstruction after the crisis that caused the coronavirus pandemic , and occupy, in alarm a good part of the time, the majority of the salmon pages in the last weeks (and not only the salmon ones).

The challenge to recovery is real. But so are the inertias, trends and policies that favor economic recovery, including the transformation of the productive structure that the European Commission intends in the EU with the Next Generation as the spearhead,unbeatable financing conditions sought by the European Central Bank (ECB).

The favorable approach after the extraordinary shock of the Covid still overcomes the uncertainties and can be summarized, schematically, in a not necessarily equilateral triangle of positive factors, whose vertices would be the growth of corporate profits, the increase in investment in capital – known as capex in financial jargon and which has its main accelerator in European funds – and the disallowance of contained demand, as a consequence of the confinements and restrictions that were implemented to stop coronavirus infections in Europe for more than one year, from March 2020 until vaccination reached the majority of the population this summer.

The top vertex of this positive triangle of the economy is the growth of the benefits, which is also being the most important support for the stock markets, which are reluctant to correct despite having advanced most of the reconstruction, if not all in some cases . The Stoxx 600, the index that brings together the largest and most liquid European companies, bounces about 70% from the ground of the Covid crisis, after having fallen just 1% from the maximum of the recovery and also historical that it conquered on August 13, 2021.

The most advanced sectors on the stock market are the automobile, with gains of 150% from the floor of the March 2020 crash, technology, 120%, leisure and travel, almost 120%, and industry, with an increase of 110%. Some increases that have found the main support in the increase in the profits of listed companies in Europe, especially since the second quarter and this summer, and also, and perhaps more relevant, in the improvement of expectations for the closing of 2021, and for 2022 and 2023.

As calculated by elEconomista’s Speedometer , in the last three months, the average forecast of net earnings per share of the consensus of analysts that Factset gathers for the Stoxx 600 has increased by 8.4% for this year, by 4.9 % for the following period and 3.6% for 2023. The increase in the estimate in the Ibex 35 for 2021 goes to 30.3%, in the same period, while it remains at 7.3% for 2022 and 3% by 2023.

“Investors are clearly still impressed with what they are seeing in the earnings season and that has offset the looming nerves around short-term risks to growth,” acknowledges Craig Erlam, Oanda’s Europe strategist.

“With around a third of European companies that have already presented their third quarter results so far – as of October 29 – 58% have exceeded earnings per share for the same period of 2020, above the historical average, but nonetheless, this is the weakest pace since the start of the recovery, “observes the team of analysts at BofA Global Research.

“62% of companies have exceeded sales expectations, a historically high level, but also below the 12-year maximum of 67% observed in the last quarter,” continue the experts from the North American bank’s investment firm. They add: “The consensus projects a 42% year-on-year growth in earnings per share for the Stoxx 600 in the third quarter, down from 190% in the second, as the positive base effects fade.”

Consensus expectations for Stoxx 600 earnings per share growth in 2021 rise to “an all-time high of 59%,” highlighted on BofA. “Banks, energy and telecommunications have achieved the highest gains among European sectors to date, while real estate, industrials and basic resources companies have lagged,” details this report, which has an impact, ” Among European countries, Spain is at the forefront in improving profit expectations “.

“Microeconomic issues have regained prominence in the markets with the earnings season: so far, the figures presented are good and that contributes to the upward revisions in earnings prospects, which, in a stock market that has barely moved from the beginning of the summer, it automatically leads to lower valuations, which once again breathes a bit of appeal into growth stocks that had become very expensive, “says Olivier de Berranger, director of asset management at La Financière de l ‘ Echiquier.

The most aggressive growth strategies of the Ibex 35 are concentrated in renewables, communication networks and real estate
The growth of capital investment (or capex) is another of the vertices of the positive triangle of the economy, with a growth in the last six months of the expectations for the companies of the Stoxx 600 very significant, and despite the uncertainties, the 5.9% in 2021, 5.8% for 2022 and 7.9% for 2023.

The most aggressive growth strategies of the Ibex 35 are concentrated in renewable energies, communication networks and in the real estate sector if capital expenditure is measured in relation to turnover. Solaria and Red Eléctrica, in the first group, Cellnex, as the absolute leader of the second, and Colonial and Merlin, in the third segment of activity, are the large companies listed in Spain that will invest the most in 2021 compared to their sales, according to estimates of the analyst consensus gathered by FactSet.

More investment to transform
This expectation, crucial in the economic recovery after the coronavirus pandemic and in line with the reconstruction funds of the European Union (EU) -the Next Generation EU-, focused on the green transition and the deployment of 5G, among other aspects such as , of course, the reinforcement of health, digitization or territorial cohesion, throws a clear sign of optimism in Spain.

At the beginning of this month of June, Barclays published a report, entitled The return of capex, which precisely affects the impact of the stimuli on capital spending, highlighting that “only Italy and Spain will receive almost half of the Next Generation and that 25% of the European budget is allocated to the energy transition “. Two milestones that imply “the greatest investment needs in the sector in history”, according to the investment firm.

In general, Ibex 35 companies (not including banks and insurers) will already exceed pre-crisis investment in 2021, according to the same forecasts. The capital expenditure of large non-financial companies sank in 2020 by about 20%, from the 36,400 million euros that were reached in 2019, to just 29,000 million, as an irremediable consequence of the impact of the Covid on economic activity, with companies in the travel industry -the most damaged by mobility restrictions- reducing their investments by between 30% (Amadeus) and 50% (Meliá, IAG and Aena).

The average estimate of the experts indicates that the investment as a whole will recover completely this year, even increasing by 13.6%, rising to 41,365 million. According to these same expectations, around 40% of the companies in the benchmark index in Spain will increase their capex in 2021 compared to 2019.

“There is a big problem with capex today and it is the uncertainty that surrounds many business models, with very important structural changes,” adds Gonzalo Lardiés.

“The increases in investment by companies in recovery scenarios such as the one we are experiencing are positive […] because of the consequences that these investments have in the form of employment, production, productivity and consequently GDP”, argues Albert Garrido, head of discretionary portfolio management of MoraBanc, who considers that the capex levels at 2020 lows are “common in episodes of crisis where companies prioritize cash generation and survival.”

But, as he admits, “they are not sustainable over time given the finite or exhaustible nature of many tangible assets.”

Added to this is a gradual recovery in aggregate demand and supply chains that are being very stressed in very diverse segments (semiconductors, freight, materials or energy as examples) “, continues Garrido.

“There is a big problem with capex today and it is the uncertainty that surrounds many business models, with very important structural changes,” adds Gonzalo Lardiés, manager of Andbank. “These technological, digital, environmental, mobility disruptions, etc., make capital spending totally distorted and the comparison is very complex: companies like Repsol, for example, can increase capex but it is unlikely that they will allocate resources to exploration and production, and yet it increases them exponentially in the transformation of the company towards the renewable energy sector “, points out this expert.

The ‘dammed’ demand
The demand contained during the most complicated moments of the coronavirus pandemic and the rebound in consumer confidence, to historical highs, as reflected by different sentiment indicators and surveys, as activity has been reopening and establishing the new normality they are the third vertex of the triangle of economic optimism.

“The dammed demand has partially offset the lost spending and the savings rate has decreased”, clarifies Cristina Nogaledo, economic policy analyst at BFF Banking Group in her latest outlook report for Spain, in which she affirms that “the reopening of large part of the economy is supporting a vigorous rebound in the service sector. ”

“The implementation of measures such as job retention schemes and public guarantee programs have made it possible to preserve the productive fabric”, underlines the economist.

From a purely macroeconomic point of view, and along the same lines, “the growth expected by the IMF for the Spanish economy in 2022, 6.4%, would place it at the head of the developed economies, which would grow on average in line with the 4.5% and the expected growth at a global level of 4.9% “, recalls the BFF Banking Group expert, although she warns that” the macro table included in the General Budgets for 2022, with a growth of 6.5% forecast for 2021 and 7% for 2022 seems overly optimistic based on data from the second [and third] quarter of 2021 and the gradual decline in the main economic indicators of confidence in recent months, the rising energy costs that are pushing the inflation rate above 5.5% and problems in supply chains. ”

The threat triangle
Commodities, with a barrel of oil above $ 80 and gas soaring, inflation, precisely accelerated by the vertical increase in the cost of energy, and bottlenecks are the three corners of the triangle of threats and risks.

“The key fact about commodity cycles is that they tend to be quite long. The fossil fuel industry collapsed last year when OPEC + failed to reach an agreement to adjust supply down quickly enough. Discipline is back and it is clear that Russia, Saudi Arabia, Algeria and other producers will use their influence to maximize revenue and the Biden Administration is finding it difficult to promote increased production of shale oil on the eve of COP26, “observes Axel Botte, Global Strategist at Ostrum AM, an affiliate manager of Natixis IM.

Regarding the other major uncertainties, the expert reflects: “The high inflation environment and persistent supply constraints are likely to call into question the current high level of corporate margins. The ECB will now have to weigh the risks of runaway inflation and the fear of a financial shock caused by a possible fall in [monetary stimulus]. The fragile solvency of the eurozone states will require flexibility for a long time. ”

Undoubtedly, inflation in general is the main threat to the euro area economy today, due to the consequences that it would entail if it coincided with a much more pronounced slowdown in economic growth . “It is not clear to what extent inflationary pressures are due to a temporary excess of final demand or temporary problems in supply, or to both factors,” says Yves Bonzon, strategist at Julius Baer.

“At first glance, the productive capital stock has not been depleted by the pandemic. It is true that, when it comes to fossil fuels, efforts to reduce carbon dioxide emissions may have led to underinvestment. in these sectors, so we would be facing a new price equilibrium. However, given the multiplicity of factors that influence the price of oil in the short term, it is difficult to draw reliable conclusions that are, therefore, useful for investment, “he concludes.

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