Global earnings can rise more than 10% in 2017

Corporate results are well ahead of expectations, in the US (+2.5% surprise) but also in the Eurozone (+17%) and Japan (+20%).

We think that in 2017 global earnings can rise more than 10%, driven not only by a larger contribution from commodity sectors (thanks to higher oil and metal prices) and financials (thanks to higher bond yields) but also by a recovery in profit margins (productivity improvement and signs of better pricing power). In the Eurozone and Japan we see similar margin trends, although operating margins in the Eurozone are still cyclically depressed. It is likely, however, that the margin improvement in the Eurozone could be more substantial than elsewhere. Another element that plays a role is the higher cyclicality of the Eurozone (due to the sector composition) and the fact that given the higher unemployment rate, the upside pressure on wages is more limited than in the US. The speed with which this margin gap with the US will narrow also depends on the trends in nominal growth. From this point of view, inflation is helpful for corporate margins, as companies do have fixed costs (e.g., depreciation based on the historic cost price or interest rates on long-term bonds issued) in the short to medium term. Better use of the existing capacity will drive margins further up.

For an investor, dividends are even more important than earnings. Dividends create regular income, and this is valuable in an environment of low corporate bond yields. Dividends and dividend growth are also key in determining the value of a company. Will earnings growth help increase dividends? A number of variables are important: the payout ratio, financial leverage, corporate confidence in the sustainability of the earnings improvement and, of course, cash flow generation and the use of that cash. History shows that sector differences are huge and that an inverse relation exists between the safety of the dividend and the dividend yield level.

Valentijn van Nieuwenhuijzen – Chief Strategist and Head of Multi Asset – NN Investment Partners