Strong dollar and weak oil price likely to boost Europe’s corporate profits

19th January 2015

The strong rise in the US dollar and the fall in the oil price are likely to provide a boost to corporate profits in Europe and Japan this year asserts Carlo Capaul, head of global equities at Swiss & Global Asset Management. He explains why…

In both regions, profits are likely to exceed expectations, while there could be disappointments in the USA.

However, there is limited room for dividend increases in regions where the strong US dollar and the low oil price are causing problems, for example emerging markets such as Brazil, Russia or Malaysia.

The individual business models of companies, as well as the climate in their specific industries are key considerations for investors in these markets. This also applies to countries such as France or Italy which are struggling with economic problems.

For certain euro countries the framework conditions are indeed difficult; however, this does not mean that companies in these countries – in particular outside the finance sector – should be avoided. Many European companies operate globally and achieve only a small share of their sales in their home countries. Russia should however be approached with caution. Given the political and economic conditions, it will remain an unattractive environment for dividend investors in 2015.

This year, global dividend volume will grow by a single-figure percentage. The most important influencing factor will be corporate profits, as the global backdrop is unlikely to change much, even if the US Fed becomes the first leading central bank to introduce a more moderate monetary policy during the year. We expect real economic growth of 2.3 percent and nominal economic growth of 4.1 percent in industrial countries (measured in US dollars), and nominal growth of 11 per cent in emerging markets.

Non-index-oriented investors will likely shift part of their commitments to favourable markets such as the eurozone, Japan, China, Thailand, Taiwan and Turkey, in attractive sectors such as industrials, telecommunications and non-basic consumer goods.

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