Drifting into high gear
Judging by the number of research reports received last week, one can only conclude that earnings season has truly taken off with earnings releases ‘drifting’ into high gear. Thousands of publicly listed companies are expected to file quarterly earnings reports, all within a few weeks of each other. Trading stocks during earnings season can be very unpredictable and can sometimes certainly be a roller-coaster ride for investors. First, it's hard to know whether the company will beat, miss or meet analyst forecasts. Second, as all investors very well know, it is perhaps even more difficult to anticipate how shares will react to the earnings release. Also, it's not just the actual results that can boost, or weigh on, a stock's price, the overall market environment can also affect quarterly publications. Adding to the complexity is the existence of an anomaly described as the post-earnings-announcement drift (PEAD) which goes against the efficient market hypothesis. The efficient market hypothesis implies that in a (semi-strong) efficient market, upon receiving new information (such as quarterly results), investors instantaneously adjust their expectations with respect to future earnings, which in turn are reflected instantaneously in stock prices. However, the post-earnings-announcement drift stipulates that stock prices continue to ‘drift’ in the direction suggested by the earnings surprises, positive or negative, for a long period (at least 60 days) after earnings announcements. According to Bernard and Thomas (1989) most likely this anomaly is caused by investors with bounded rationality failing to fully appreciate the earnings information, which results in a delayed price response. To this day researchers remain puzzled by the way a company’s stock price responds after earnings announcements.
On the macro-economic front, last week investor focus ‘drifted’ towards The European Central Bank’s (ECB) latest policy meeting. Amid trade tensions across the globe and signs of a slowdown in the Eurozone, most economists expected the ECB to keep rates on hold. And that’s exactly what happened: ECB’s chief Mario Draghi played down concerns over weakness in the euro zone economy as the ECB kept policy on hold, fuelling expectations that it will halt bond purchases (currently at EUR 30 bn a month) by year-end. In any case with the current bond purchasing scheme due to expire in September, the ECB will have to decide in June or July whether to extend purchases or withdraw the stimulus that cut borrowing costs and revamped growth but failed to lift inflation back to ECB’s target of “below but close to 2%”. The Bank of Japan also decided to keep its monetary policy unchanged and removed the phrase on the time frame for achieving its 2% inflation target, which is already the 6th time the inflation goal has been postponed since it was set back in 2013. Equity markets also had to look twice when last week the US Treasury yield climbed above 3% with, according to ING, 3% being the level where text books say that dividend yield can no longer protect equities from switching to bonds. However, equity markets did not overreact at all and yields actually came down after just one day.
Last trading week, the Ageas share eventually ‘drifted’ to EUR 44.08 (+1.2%) outperforming both the Eurostoxx 50 (+0.7%) and the SXIP 600 Insurance index (+0.3%).