Summary
Key takeaways
We believe that European companies’ Q1 earnings should remain relatively robust. As the Iran conflict only started at the end of February, the impact is likely to be more visible in Q2 reporting and beyond; while the pullback in share prices so far have mostly been due to valuation multiple de-rating from a higher equity risk premium given the uncertain outlook. The eventual magnitude of the earnings impact will ultimately depend on the intensity of the conflict and how long the Hormuz Strait energy supply blockages persist.
We note that generally periods of higher inflation tend to support nominal earnings, while stronger currency pairs at the end of Q1 (compared to when guidance was issued in Feb), such as USD/EUR, should also be a modest tailwind for some sectors (e.g. pharma companies generate more than 50% of revenue from North America). As evident from the Ukraine invasion experience of 2022, EPS growth was revised higher for many sectors, with energy leading the way. This should be the case again for the Iran conflict, with energy and utilities set to benefit from higher oil, LNG and power prices.
In addition, the financial sector’s revenues should benefit from the higher yield backdrop, albeit potentially offset by any front-loading of loan provisions under the new IFRS 9 accounting rules for some institutions (mostly by the UK Asian banks which have exposure to the Middle East region). Chemical companies could benefit from supply dislocations, and airlines are protected in the near term by fuel hedging programmes, although they face jet fuel shortages if the situation persists. The push by policymakers to secure Europe’s energy supply over the coming years is also likely to intensify, and this should support the renewable industry, as well as companies involved in the electricity grid buildout.
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