Iran war clouds European corporate earnings outlook

A trader watches news on a television monitor as the DAX Index yield curve shows a drop at the Frankfurt Stock Exchange, operated by Deutsche Boerse AG, in Frankfurt, Germany, on Monday, Dec. 7, 2020.

The U.S.-Israel war with Iran is clouding the outlook for European firms ranging from airlines to retail, despite hopes for robust first-quarter earnings, with higher energy prices, supply-chain disruption and slower growth weighing on forecasts.

Tesco, Britain’s top food retailer, cited uncertainty over the conflict, warning it could result in profit falling this year. French spirits group Pernod Ricard warned a decline in tourism due to the war would hurt its sales.

Britain’s easyJet warned of a bigger first-half loss on Thursday, denting its shares, while British retailer Dunelm said customers were tightening spending due to uncertainty linked to the conflict.

Much will depend on how long the Iran conflict persists, with growing hopes for a peace deal that could open the Strait of Hormuz and ease oil flows that have pumped up global prices.

Escalating regional tensions have roiled markets, raising concerns that a prolonged conflict could result in further oil price rises, raising inflation and dampening consumer demand.

Activity hasn’t yet ‘fallen off a cliff’

European companies are expected to report “relatively solid” earnings for the January-March quarter, said Ciaran Callaghan, head of European equity research at Amundi, despite the Iran war affecting roughly one-third of that period.

“It takes a while for higher oil prices to feed through into the economy, so activity levels shouldn’t have fallen off a cliff,” Callaghan said.

Though investors estimate European blue chips’ direct exposure to the Middle East to be in the low single digits, lower economic growth, supply-chain disruptions, uncertainty and higher inflation are the real dangers.

Still, the magnitude of the hit will hinge on the duration of the war. European stocks dropped in the first weeks of the war, but they have since recovered as sentiment improved.

“I don’t think the Q1 numbers will disappoint, but the Q1 outlook for the rest of the year might,” said Ben Ritchie, head of developed markets equities at Aberdeen.

Some early reports from the chip industry have already appeared to support analysts’ expectations of relatively solid earnings for the quarter.

ASML, the world’s largest supplier of chipmaking tools, on Wednesday reported better-than-expected quarterly earnings and raised its annual outlook as the AI boom continues.

German chip systems manufacturer Aixtron also posted strong orders, hiking its revenue guidance for 2026 on Tuesday.

Energy up, consumer firms down

The war is having contrasting impacts on different sectors.

Companies on Europe’s benchmark STOXX 600 index are expected to report 4.2 per cent growth in first-quarter earnings, according to an LSEG I/B/E/S report last week, but that is mostly due to the energy sector.

Higher crude prices have buoyed energy companies, and European majors are expected to deliver 24 per cent higher first-quarter profits compared to last year. TotalEnergies cited a boost from higher energy prices caused by the war, even as it shut down 15 per cent of the French group’s overall production.

Renewables are also set to benefit. The crisis has highlighted Europe’s dependence on fossil fuel imports, said Hansjorg Pack, senior portfolio equity manager at DWS.

“The conclusion can only be to further accelerate the installment of alternative energy sources and investments in the grid,” he told Reuters.

While higher inflation could hurt consumer-related companies and luxury goods firms, it could benefit banks, said Callaghan.

“There’s a lot of talk about potentially central banks hiking rates and the ECB doing it another two times by 50 bps in total, which could be quite helpful for the European banking system,” he said.

LVMH and Hermes have flagged that first-quarter sales were hit as the Iran war dented spending in the Middle East, further delaying a long-awaited sector recovery.

‘Selective winners’

Despite some “selective winners,” the conflict is not supportive to European earnings overall, said Christoph Berger, chief investment officer for European equities at Allianz GI.

Berger, who had predicted high single-digit to double-digit growth for European corporates before the war began on February 28, now forecasts “solid,” but not double-digit, earnings growth for the first quarter.

LSEG said first-quarter revenues are forecast to fall 0.6 per cent on average, excluding the energy sector, showing corporate cost cutting and restructuring efforts could be paying off.

Share buy-backs

Though some companies have slashed their proposed dividends, there are no signs this is a trend yet, investors said.

In fact, companies have increased share buy-backs to stop the recent stock selloff, said Marcus Morris-Eyton, portfolio manager at AllianceBernstein.

“We have seen a noticeable step up in share buy-backs, with current valuations offering a great return on investment for many companies,” Morris-Eyton said.

(Reporting by Javi West Larrañaga and Ozan Ergenay in Gdansk; Editing by Matt Scuffham, Adam Jourdan, Jan Harvey and Alexander Smith)