Citi forecasts 41% dive in financials' future earnings
Earnings from global financial companies will collapse by a further 41% by the middle of next year, and could be wiped out completely in a worst case scenario, Citigroup analysts have predicted in a pessimist equity strategy report.
The Citigroup strategists have argued in the report, Global Equity Strategy – Stress Testing, that analysts' earnings estimates for the sector have been far too optimistic and that financial stocks still look the most expensive in the market as the anticipated fall in earnings has not been fully factored into valuations.
It predicted that equity returns for global financials would plumb new depths to 3.5% by the middle of 2010, down from a historic low of 5.9%.
It has based its analysis on the depth of the recessions in the early 1990s and 2000s, when global equity returns fell to about 8% from a peak of 14%. The forecasts are based on the MSCI global trailing earnings index, a measure of earnings per share over the previous 12 months, which peaked in the fourth quarter of 2007.
Earnings by global financials have already declined by 67% since the last quarter of 2007, equal to a $406bn (€317bn) contraction in profits, taking the sector back to 2003 levels of profitability.
Within the sector, banks have so far been the least affected with a 39% fall in global equity earnings from a peak in late 2007, compared with a 109% drop for diversified financials, which is dominated by investment banks, and 82% for global insurers.
Despite this dramatic slump, Citigroup equity strategists have argued that financial stocks still look the most expensive in the market, mainly because the anticipated trough in earnings has not been fully factored into valuations. The financial and consumer discretionary sectors are both trading on about 25 times trough earnings.
The Citigroup report also set out a worst cast scenario in which the trough in global equity returns is worse than in previous cycles by the same amount that it overshot previous peaks. Under these bleak circumstances, global equity returns could slump to a low of 6% and equity returns in the financial sector would be wiped out completely.
As the global financial sector currently account for 75% of global earnings, the analysts forecast that overal earnings will fall a further 40% by mid-2010 or 55% under the worst case scenario.
-- Write to Dawn Cowie at dcowie@efinancialnews.com
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