Author: Alastair George
Headlines in respect of the tragic personal costs of the COVID-19 pandemic and continued social restrictions risk distracting attention from the resilience of global profits expectations for 2021. Despite the re-introduction or extended duration of significant social and travel restrictions, consensus profits forecasts for 2021 have remained robust and as a result global equity markets have continued to recover. Investors remain focused on the post-vaccine scenario which should come into view by mid-2021. There may be concerns about valuations in certain sectors, given the remarkable central bank-driven rally during 2020, but for now corporate fundamentals in aggregate remain strong.
Exhibit 1: Global earnings estimates for 2021 close to pre-COVID-19 levels
Source: Refinitiv, Edison calculations, weighted data.
The second wave of COVID-19 has unfortunately proved as strong as the first, with significant pressure being placed on healthcare facilities in many major nations, leading to further social restrictions to control the rate of infection. New strains of the virus have been discovered in South Africa and the UK which are more infectious than the original variant and have proved impossible to control, without full lockdown conditions.
The resurgence in COVID-19 infections in the UK has led to a much longer period of social restrictions than we had hoped as recently as November. At least the discovery of a new strain of COVID-19 offers an explanation for the stubbornly high level of daily infections observed during December. We expect the UK will have to contend with at least another three months of severe social restrictions, and at least until pressure has eased on hospitals. The two UK-approved vaccines from Pfizer and AstraZeneca provide the light at the end of the tunnel and we believe markets will look through this temporary period of reduced economic activity, to stronger growth during H2.
In view of the recent rise in infections, we have continued to track earnings estimates on a global basis as the collapse in 2020 profits forecasts during Q120 was the key driver for the stock market declines in that period. During this second wave, consensus earnings forecasts have been surprisingly resilient. Global profits estimates for 2021 are now close to pre-COVID-19 levels and this optimism has not dimmed even where significant restrictions have been re-imposed, such as in continental Europe and the UK.
Outside certain sectors such as leisure and entertainment it seems corporate profits have proved increasingly COVID-secure. Last year’s question over where the costs of coronavirus will fall have been decided – and that is not at the feet of large companies but instead in the SME sector and on government balance sheets.
Given the stubbornness of the second COVID-19 wave it appears there are still significant challenges for a return to business as usual, leaving us to wonder if investors are a little ahead of the actual evolution of events on the ground in the hotel and travel sectors. However, while some investors may now legitimately be querying aggregate market valuations after the liquidity driven market performance of 2020, in the short term markets are likely to be supported for as long as profits forecasts remain on an upward trend.”