BlackRock revises down 'optimistic' eurozone earnings forecast

BlackRock's Nigel Bolton has revised down his earnings outlook for European corporates this year, although he is more upbeat than the consensus on the region's prospects.

The head of the group's European equity team admitted his forecast of 15% returns for 2011 were too optimistic, and said he has revised his growth forecast downwards for this year.

"Our expectation for 15% market returns had been primarily driven by our initial earnings growth expectations. Weaker than expected company top-line growth and margin pressures were the main cause of earnings downgrades throughout the year," he said.

"We revised our earnings expectations downwards in the early summer and moved to a zero growth forecast for 2011 by Q4."

However, Bolton said although the domestic demand outlook for Europe is weak, it is important to remember over 50% of European corporate earnings now come from outside the euro area, which will be supportive of earnings.

"Overall, we expect earnings to decline between 0% and 5% in 2012, which is lower than the current consensus figure of 11% growth but higher than a number of top-down estimates of -10% to -15%," he added.

Bolton said Europe has the cheapest valuations of all the developed equity regions, offering attractive entry points for long-term investors prepared to tolerate shorter-term volatility.

"Market returns for 2012 are likely to remain volatile in the short term, but if we do get a resolution to the sovereign debt crisis, then the reduction in the risk premium could allow a rerating of European equities, despite a flat earnings outlook in 2012," he said.

The manager said the ECB has made some significant moves over the last
two months to remove some of the tail risk for the banking sector which was becoming increasingly alarming in autumn 2011.

"The political decisions made at the EU leaders' summit in December showed a renewed determination to find a solution and set a roadmap in place for a move towards closer fiscal union," he added.