Supply chain chaos, surging costs set to plague Europe’s profits


The chip situation doesn’t look set to ease any time soon, judging by the early warning signs from the automotive sector. Parts supplier Faurecia SA and truck manufacturer Traton SE cut forecasts last month, while Volkswagen AG said that it faces a large order backlog due to a lack of chips. (File pic shows chip worker shws a 300mm silicon wafer at a German semiconductor plant. - Reuters)

LONDON: Cost pressures, supply-chain chaos and a reopening letdown are set to plague Europe’s third-quarter earnings season, setting investors up for more disappointment than elation.

While strong numbers from behemoths like LVMH and SAP SE reassured European stock investors last week, further good news may be needed to keep the rally alive. Rising inflation and a stalling global recovery pose a challenge to further market gains.

“We expect fewer positive earnings surprises, more cautious corporate guidance and less earnings upgrades by analysts,” said Robert Greil, chief strategist at German private bank Merck Finck.

Pandemic-related chaos, post-Brexit customs checks and a shortage of truck drivers have wreaked havoc on supply chains.

Clothing companies have been sounding the alarm ahead of the all-important holiday season, with online retailer Asos Plc warning that supply-chain problems are set to hit profit, while Hennes & Mauritz AB and Boohoo Group Plc have flagged delivery delays.

Asos and Boohoo shares plunged after the announcements.

“We expect companies to struggle with supply constraints and rising input prices,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.

Additionally, costs have been climbing for companies, a product of supply bottlenecks, surging commodity prices and a shortage of workers. Investors will be watching closely which firms have to swallow rising prices and which are able to pass them on to customers.

“Special attention must be paid to the impact that logistical problems in supply chains, rising energy costs and upward pressure on labour costs may have on results,” said Jose Antonio Montero de Espinosa, head of European equities at Santander Asset Management.

“During the third quarter, we have witnessed one of the periods with the greatest increase in inflation expectations in Europe.”

Energy producers could be natural beneficiaries. The Stoxx 600 Energy Index is up 19% over the past three months and is the top-performing sector in Europe. Earnings growth estimates for the sector have accelerated over the past few weeks as oil and gas prices have soared.

Meanwhile, the chip crunch looks set to continue. The lockdowns forced many people to conduct their lives in the digital realm, which boosted demand for gadgets. Consequently, demand for the chips that power these devices rocketed, hitting automakers to smartphone giants like Apple Inc.

The chip situation doesn’t look set to ease any time soon, judging by the early warning signs from the automotive sector. Parts supplier Faurecia SA and truck manufacturer Traton SE cut forecasts last month, while Volkswagen AG said that it faces a large order backlog due to a lack of chips.

However, the chipmakers themselves could benefit. A recent update from Taiwan Semiconductor Manufacturing Co showed that demand remains robust, with the Asian bellwether’s projections for the fourth quarter beating some analysts’ estimates.

On the other hand, it has been a reality check time for companies that got a boost during the lockdowns, now that restrictions have eased. Remote software maker TeamViewer AG plunged 25% in the space of one day after cutting forecasts due to weaker demand from business customers. ―Bloomberg

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