Macquarie Research What caught my eye v.104
16 January 2019 2
Have EPS estimates been sufficiently cut Not likely
‘If everyone is thinking alike, then somebody isn’t thinking’ — George S Patton
As can be seen below, global EPS expectations have recently dropped from ~10% for both 2019
and 2020 to ~7.5% in 2019 while remaining at ~10% for 2020. Analysts continue to assume that
margins would be maintained (and indeed drift up), as revenue growth rates are expected to be
maintained at ~4.5%-5.0% clip, or just shy of the expected global nominal GDP.
A similar trend is evident in the US, with SPX earnings expectations easing from 10%-11% range
that prevailed in September 2018, to 7.3% for 2019 (vs ~15% growth expected for 2018 ex tax
cuts), while expectations remain at ~11% for 2020, with revenue growth continuing to chug along
at a ~5% clip. We find the most aggressive expectations within DM universe are currently
imbedded in Eurozone, where analysts are continuing to expect ~9% EPS growth for both 2019
and 2020 (vs 2018 EPS growth of ~4%), despite continuing slower economic growth rates and
significant political and monetary uncertainties, especially in 2019. In line with other key markets,
analysts expect no margin erosion, as revenue growth rates are anticipated to be maintained a 3%
clip. As was the case last year, the most conservative EPS estimates are imbedded into the
Japanese market, with EPS growth rate of only ~2% for 2019 and ~4-5% for 2020; but again, there
is an expectation that recent margins improvement would be maintained.
Fig 1 MSCI AC World – EPS growth estimates (%) – fuelled
by US Tax cuts ’18 growth reached 15% (or ~11% ex tax)…
EPS estimates down to ~7.5% in ’19, rebounding to 10% in
’20 as…
Fig 2 MSCI AC World – revenue growth estimates (%) - …as
revenue growth rates are expected to stay at ~5% clip, and
margins are continuing to gain momentum
Source: Datastream; Macquarie Research, January 2019Source: Datastream, Macquarie Research, January 2019
Fig 3 SPX – EPS growth estimates (%) – after a rise of 15%
(ex-tax cuts), US EPS growth rates are expected to be down
to 7.3% in ’19 but rebound to 11% in 2020
Fig 4 SPX – revenue growth rates (%) – …as revenue
growth rates recede from 8.5% to ~5% clip for 2019-20, and
margins continue to expand
Source: Datastream; Macquarie Research, January 2019Source: Datastream, Macquarie Research, January 2019
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EPS expectations are
dropping everywhere,
including…
Macquarie Research What caught my eye v.104
16 January 2019 3
Fig 5 MSCI EMU – EPS growth estimates (%) – analysts
expect a pick-up in growth rates to ~9%-10% clip in both ’19
and’20
Fig 6 MSCI EMU – Revenue growth estimates (%) - …even
as revenue growth rates remain at ~3%-4% clip
Source: Datastream; Macquarie Research, January 2019Source: Datastream, Macquarie Research, January 2019
Fig 7 MSCI Japan – EPS growth estimates (%) – estimates
are down to ~2% in 2019 and ~5% in 2020
Fig 8 MSCI Japan – revenue growth estimates (%) -…as
revenue growth rates estimated at ~2%-2.5%
Source: Datastream; Macquarie Research, January 2019Source: Datastream, Macquarie Research, January 2019
As far as the EM universe is concerned, in 2017, it benefited from a significant relative acceleration
of EPS growth rates when compared to DM markets, as synchronized economic recovery, ample
liquidity and weaker US$ helped propel EM economies and EPS growth rates. Not surprisingly,
over a period of two years (from February 2016 to February 2018), EM equities outperformed DMs
to the tune of ~25%.
However, the position had reversed in 2018, with both EM and DM EPS growth rates slowing, and
a much sharper decline occurring in the EM universe. Again, not surprisingly from the high in
March 2018, the EM universe underperformed by ~12% (and at one stage in late 2018, EMs were
down 18%-19% against DMs). In 2019, the expectation is for a continuing decline in EM and DM
EPS growth rates, of broadly equal magnitude, and for 2020, it appears that analysts are currently
projecting a broadly comparable EPS growth rate uptick. As discussed below, it intuitively does not
place EMs in a dramatically better or worse position as we progress through 2019, with the
direction and strength of US$ being the key decision variable.61014Oc
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…EMs and Asia ex
Japan
The good news is that
pace of EPS erosion in
EMs mirrors DMs
Macquarie Research What caught my eye v.104
16 January 2019 4
Fig 9 EM vs DM EPS 2017 (indexed) – sharp EM relative
acceleration, from late 2016 onwards
Fig 10 EM vs DM EPS 2018 EPS (indexed) – reversal of
2017, with sharp EM de-acceleration vs DMs
Source: Datastream; Macquarie Research, January 2019Source: Datastream, Macquarie Research, January 2019
Fig 11 EM vs DM EPS 2019 (indexed) – both EM and DM are
de-accelerating
Fig 12 MSCI EM/DM relative performance – outperformance
in 2017 and underperformance in 2018
Source: Datastream; Macquarie Research, January 2019Source: Datastream, Macquarie Research, January 2019
Analysts currently expect that MSCI EM EPS growth rates would slow down from 12% in 2018
(this was closer to 14%-15% expected growth clip in mid-2018) to ~9% in 2019 (down from
estimates of ~11%-12% six months ago) and then EPS is expected to rebound to 11-12% clip in
2020. There is also a strong expectation of better margins, with revenue growth rates expected at
~7% in each of 2019-20. For Asia ex Japan, the trends are similar, with EPS estimates for 2018
already cut from 13% six months ago to around 10% while 2019 estimates are now closer to 8-9%
(vs 11% expected six months ago) and EPS estimates are anticipated to rebound to ~11%-12% in
2020, on revenue growth rates of ~7% in both years.
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EMDMAsia ex JP
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Jan
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MSCI EM/ MSCI DMMSCI EM $ / MSCI DM $
Up 25%
Down 42%
Down 12%。