Robust US spending and rebound in Europe will help boost global profits | South China Morning Post
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Robust US spending and rebound in Europe will help boost global profits

Robust spending in the US and an economic rebound in Europe will help boost global profit growth this year

PUBLISHED : Tuesday, 04 February, 2014, 5:57am
UPDATED : Tuesday, 04 February, 2014, 5:57am

Global corporate earnings growth is poised to accelerate this year as higher consumer spending in the United States and Europe's gradual rebound from a two-year recession help offset slower economic expansion in China.

3M, which sells consumer, health-care, industrial and safety products, said sales growth might double in the US and demand was improving in Western Europe.

Company earnings in Japan may rise about 9 per cent in the next financial year as the weaker yen aids exporters such as Toyota Motor. Even French carmaker Renault is projected to reverse a three-year slide in earnings this year as European sales rebound.

"What we've got going on for the first time in this recovery is truly global synchronised growth," said James Paulsen, the chief investment strategist at US-based Wells Capital Management. "It's still slow by long-ago historic standards, but it will feel pretty good in this recovery."

Growth for the US and Europe at the same time, even if moderate, was a welcome change for company earnings, Paulsen said. The US economy is projected to expand 2.8 per cent, matching 2012 as the fastest pace since 2005, while the euro zone is on track for its first annual growth since 2011.

Although American retailers have been hurt as lower-income families rein in expenses, carmakers are projected to sell more than 16 million vehicles in the country for the first time since 2007.

European car sales were "going to get better for the first time after five years of a strong decline", Carlos Ghosn, Renault's chief executive, said last month. "We're going to get back slowly to growth, moderate growth, 1 to 3 per cent for the years to come."

Earnings for companies in the S&P 500 Index were forecast to rise 8.5 per cent this year from 5.2 per cent last year, data showed.

"Of the big economies of the world, the US at the moment is the healthiest," said Bob Doll, chief equity strategist at Nuveen Asset Management in Chicago. "Earnings are going to be driven by US growth and further recovery in Europe."

Jim Russell, a senior equity strategist for US Bank Wealth Management, said most companies had cut costs to drive earnings during the slow recovery from a 2009 recession and quicker economic growth would help push sales increases.

"We see company earnings doing a bit better than they did last year," Russell said. "It won't take much revenue growth to produce a meaningful jump in the bottom line because of the low-expense structure."

That is giving executives confidence to invest, with US capital spending in 2014 projected to exceed last year's US$2 trillion. UBS has predicted investment may increase 6.7 per cent this year, up from 2.6 per cent.

That optimism has been reflected in the stock market, with the S&P 500 and the Dow Jones Industrial Average both trading near record highs. Even Europe's Stoxx 600 ended 2013 with a 17 per cent annual gain, the biggest since 2009.

Some US consumers are getting more comfortable after housing prices rebounded, the stock market surged about 30 per cent last year and the unemployment rate reached the lowest since October 2008 in December.

US companies in the S&P 500 Index are sitting on a record US$3.6 trillion of cash and short-term investments, at the same time that interest rates are low and raw materials prices are in check.

However, profits in emerging markets may not keep pace with the developed world as China cools amid a shift to a more domestic-led economy after years of export-driven growth. China's decreased appetite for raw materials is weighing on commodity companies in countries such as Brazil and Chile.

European companies from London-based Diageo to Unilever and Remy Cointreau have seen a slowdown in previously fast-growing regions. Diageo, the world's largest distiller, missed sales estimates last week as China and Nigeria weighed on revenue growth in the second half of the year.

China was forecast to grow 7.4 per cent this year after 7.7 per cent last year, data showed.

Even with China trending slower, the world economy is forecast to expand 3.6 per cent this year, according to 36 economists' estimates, up from 2.9 per cent in 2013. The US may expand 2.8 per cent this year while the euro zone will grow 1 per cent after contracting 0.4 per cent, according to estimates.

Japan is catching more investors' attention as monetary easing and fiscal stimulus under Prime Minister Shinzo Abe spur an economic recovery.

"We've done this whole recovery without Japan and without Europe and I think we've got them both back," Paulsen said. "The overall growth rate in the globe is going to be the best it's been in the recovery."

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