*
Wage increases increase cost pressures
*
Earnings estimates deemed too optimistic
*
Stoxx 600 Q3 profits expected up 32%
*
The index has lost more than 20% since the start of the year
by Joice Alves and Josephine Mason
LONDON, Oct 10 (Reuters) – The multiplication of wage increases and exceptional bonuses supposed to support the purchasing power of employees is worrying some investors, who fear a deterioration in the profits of listed companies at the same time as a recession.
Stellantis and LVMH are among the many companies that have announced in recent weeks the payment of exceptional bonuses to help their employees cushion the impact of soaring energy and food prices.
While these bonuses are relatively easy to finance for multinationals, some shareholders are concerned about the early opening of annual wage negotiations or generalized wage increases in certain groups.
In the United Kingdom, for example, the majority of retailers have already raised hourly wages twice since the beginning of the year, while in France, Carrefour has proposed a wage increase and an exceptional bonus and that Stellantis has brought forward the opening of annual trading initially scheduled for early 2023 to December.
In Italy, the unions of Stellantis, Ferrari, Iveco and CNH Industrial have announced that they will demand increases of more than 8% in 2023 during discussions which open this week.
And the most exemplary file of the moment is that of TotalEnergies, whose management proposed on Sunday to bring forward discussions on wages on condition that the unions lift the blockade of refineries which have been shut down for almost two weeks, a movement which disrupts fuel supply in a large part of France.
The wage debate therefore adds to the many current pressures on businesses, from rising energy and raw material costs to rising interest rates and supply chain disruptions. .
So far, many companies have managed to pass on their rising costs to the prices charged to their customers. But the recent warning issued by H&M, the world’s second largest clothing company, of a risk of falling demand suggests that consumers are beginning to balk at the waltz of labels.
Analysts and managers polled by Reuters already paint a clouded picture for the final months of 2022 and point to growing difficulties in 2023.
Hani Redha, global multi-asset manager at PineBridge Investments, said he expects Europe to slide into recession in the fourth quarter.
“It can lead to a general drop in margins because at that point we won’t just be talking about a slight pressure on margins linked to salary increases,” he says.
Stephane Ekolo, global equity strategist at Tradition in London, said he expects the third-quarter earnings season to be punctuated by warnings and underperformance, which would put prices under pressure.
“Wage increases will only further fuel inflation to the detriment of corporate margins, which are still faced with rising costs,” he explains.
Europe’s broad Stoxx 600 index is already down 20% year-to-date and heading for its worst annual performance since the 2008 financial crisis.
According to Eurostat, the producer prices of companies in the euro zone jumped 43.3% year on year in August, an increase more than twice that suffered by their American competitors.
About half of the region’s manufacturers have lowered their margin forecasts since the start of the year, Bernstein said.
Despite this, Stoxx 600 earnings are expected to post a jump of around 32% in the third quarter compared to the same period last year according to Refinitiv I/B/E/S, and 11.8% if we excludes the energy sector, the most favored by soaring gas and oil prices.
Such an increase would be higher than that of the second quarter but lower than that of the third quarter of last year, boosted by the recovery in activity after the lifting of most health restrictions.
But given the difficulties of the moment, such a consensus risks being too optimistic, warn some analysts. And beyond the third quarter, the situation is likely to deteriorate quickly: profit growth should fall to 19.5% over the last three months of the year and to only 1.7% in the first quarter of 2023, still according to Refinitiv data.
The trend would then reverse with a 4.4% drop in profits in the second quarter of next year, then 3.8% in the third.
It is difficult at this stage to predict the magnitude of the salary increases in sight in 2023 but it will probably be much higher than the figures of recent years.
Katharina Koenz, senior economist at Oxford Economics, estimates that the annual negotiations will result in an average rise of 4% to 5%. A high range but lower than inflation, which implies a deterioration in the purchasing power of employees and therefore a risk of consumption erosion.
For the moment, Florian Ielpo, multi-asset manager of Lombard Odier Investment Managers, believes that the markets, concerned above all by the rise in interest rates, are neglecting the double risk of inflation (including wages) and the decline in demand.
“So far stocks have not priced in the risk of lower earnings (..) The only thing that has priced in is rising rates, not falling demand.”
(Report Josephine Mason and Joice Alves, French version Marc Angrand, edited by SophieLouet)