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ING Investment Management predicts the biggest earnings decline in decades is about to come to an end

ING Investment Management (ING IM) believes that a 4-5% revenue growth combined with the positive effects of cost cutting could easily push up corporate earnings by 30% or more in the US and in Europe. However, a return to the long term earnings trend is not expected before 2011-2012.

ING IM believes Q4 2009 marked the bottom in margins with the first quarter showing the biggest year-on-year profit increases, especially for the more cyclical sectors and financials.

Patrick Moonen, senior equities strategist at ING IM, says: “The past equities earnings recession was the worst since at least the early seventies. As a consequence US earnings per share has hardly grown over the last 10 years, and it is no wonder that the return of equities over the last 10 years was anaemic. The trailing earnings figure for the US fell back to 34% below the long term trend, the highest negative deviation ever.

“Historically it takes two to three years for earnings to recover to trend level. It will not be different this time. Even by assuming a 30% earnings growth in 2010, earnings would still remain 20% below trend. A return to the trend is thus not expected before 2011 or even 2012.

“This will be even more the case if, as expected, governments tighten fiscal policy by increasing corporate taxes and interest rates are hiked. Finally, we must not forget that GDP growth in developed countries is likely to remain subpar for the coming two to three years.”

ING IM believes that the US market has already discounted higher earnings growth than the European market. This is the reason why ING IM is underweight in the US market and overweight in the European equity market.

For emerging markets, the discounted earnings growth is less than 20%, well below the levels that ING IM forecasts for the asset class.

Overall, ING IM maintains its optimistic view on the equity market. This is based on improving growth figures, the upturn in the earnings cycle and the continued attractive valuations, especially outside the US.

Patrick says: “Our sector views have not changed. We favour four themes: a further rise in commodity prices via investment in materials and energy; cheap quality though healthcare stocks; sustainable earnings growth through the technology sector; and emerging market exposure via consumer staples. On the other hand we have become more cautious on financials due to regulatory risks and the adverse impact of the end of the loose monetary policies.

“With regards to style we remain overweight high dividend. Dividend uncertainty has clearly diminished, in view of the strong cash flow generation and improved balance sheets. We expect double digit dividend growth paid over 2010 earnings.”

Patrick concludes: “Regionally we are overweight emerging markets as we want to invest in sustainable growth. On top of that the fundamentals of emerging markets are globally superior to the fundamentals of developed markets (high savings rate, low indebtedness, current account surplus, low budget deficits). Finally they still quote at a 10%+-discount to developed markets.”