Allianz Contacts
Search
Allianz Contacts

Corporate finance

Double trouble? Inflation means less cash and more debt for companies

Allianz SE | Munich | Sep 07, 2022

Earnings held steady in the first half of 2022 but momentum is fading

  • The post-pandemic party is coming to a close. While the latest earnings season was better than expected on the revenue side, with only four out of 24 sectors posting a decline, half reported y/y declines in earnings. Forecasts and guidance also indicate fading momentum: Q3 revenue growth rates have been revised downwards for Latin America, APAC and emerging markets, and for 15 sectors globally.
  •  
  • Cash buffers are still high but waning.  Despite exceeding 2019 levels by 30% in Europe and 50% in the US as of Q2 2022, cash buffers are decreasing as most firms in both the US and Europe have been burning cash in 2022.
  •  
  • Due to the inflationary environment, working capital requirements (WCR) climbed +6 days of turnover to reach 71 in the US and +10 days to 64 in Europe. This has led firms to build up leverage. Meanwhile, higher interest rates are also pushing up interest expenses, especially in Europe (+20% adjusted for change in long term debt).
  •  
  • As a result, countries, sectors and firms now face different challenges. The energy crisis could be a major blow in Europe for energy-intensive sectors (Power, Paper, Metals, Railways, Chemicals etc.) while the strong dollar could harm exporting sectors in the US. Discretionary spending and construction are also at risk while energy should continue to fare well – although it is at risk of facing political action (e.g. a “superprofit” tax).

In many countries, companies are starting to burn cash.

The Q2 earnings season brought positive surprises globally, with more than half of listed companies beating consensus estimates for revenue and earnings per share (58% and 54%, respectively). However, expectations were widely revised downwards some weeks before the earnings releases due to the continued war in Ukraine, persistent supply-chain issues and semiconductor shortages caused by lockdowns in China, as well as increasing raw material prices.

Europe was the region that surprised the most. Despite the proximity to the Russia-Ukraine conflict, 64% of European companies exceeded revenue expectations and the average revenue growth rate was +16.4% y/y (+12.5% y/y in the Eurozone). In the US, 63% of firms also beat estimates, with revenue growing by +15.9% y/y. However, there was a larger gap between corporates on both sides of the Atlantic when it comes to reported EPS: While earnings grew by +18.5% y/y in Europe (+4.7% y/y in the Eurozone), they rose by only +2.1% in the US (+0.9% y/y world average). This indicates that companies on the Old Continent were better able to absorb increasing production costs compared to their American peers. 

Cash-burning index, by country

Sources: ECB, BoE, FRED, Allianz Research.

 

Contact

Ano Kuhanathan
Allianz Trade
+33 (0) 1 8411 4129
Send email
Maxime Lemerle
Allianz Trade
+33 (0) 184115401
Send email
Maria Latorre
Allianz Trade
+33 1 84 11 50 50
Send email

Download

Double trouble? Inflation means less cash and more debt for companies

Africa’s journey to net zero: USD7trn just for energy

The green energy transition is a once-in-a-lifetime opportunity for African development, a chance to reduce poverty and lift growth potential.

More information

Market Volatility and Corporate Bonds: Collateral Damage

Over the last few months, more aggressive monetary tightening, especially in the US, has led a steep sell-off in public debt markets, resulting in unprecedented interest rate volatility. Can deteriorating market liquidity cause more damage to valuations?

More information

Can the booming battery sector help Europe with its energy crisis?

Energy storage could help Europe tackle its energy crisis but is overlooked in policies, by 2030 total storage capacity will amount to about 35% of annual average Russian gas imports.

More information

Averting 'Gasmageddon' and securing a just transition

The gas crisis threatens to morph into “Gasmageddon”: The situation has worsened significantly this year as the invasion of Ukraine has caused gas prices to explode to levels not seen in well over a decade. A dual-pricing scheme could address the shortcomings of the counter-measures implemented so far.

More information
allianz flags
allianz flags

The great green renovation: the buildings sector transition

The EU’s targets for reducing emissions are not ambitious enough to meet the Paris climate goals: Taking into account its “fair share”, the EU needs to slash emissions by 65% by 2030.

More information
allianz flags
allianz flags

The (energy) price of war for European households

The invasion of Ukraine will propel Europe's already high energy prices even higher: We expect at least +30% increase in the energy bill for 2022, hitting low-income households in the UK and Germany the hardest.

More information
allianz flags
allianz flags

Can Europe do without Russian gas?

Giving up gas imports from Russia, which account for 36% of total EU gas supply, will not be easy for Europe. We estimate the amount of energy at risk across the EU at almost 10% of final consumption.

More information
allianz flags
allianz flags

Carbon farming: A transition path for agriculture & forestry

The agriculture and forestry sectors are at the frontline of climate change. Decarbonization them and the emergence of Carbon Farming are, therefore, key.

More information
allianz flags
allianz flags

EU CBAM: Well intended is not necessarily well done

The devil is in the details: The EU carbon border adjustment mechanism (CBAM) will not only become more expensive than anticipated but will likely fail to restore a level playing field for industries heavily exposed to carbon pricing, first because it is an invitation for greenwashing.

More information
allianz flags
allianz flags

Abolishing fuel subsidies in a green and just transition

Abolishing fossil fuel subsidies and directing the funds to renewable energy seems like an easy win for the climate.But getting rid of them comes with steep costs for consumers, particularly the poorest households.

More information
allianz flags
allianz flags

Big Oil: At risk of becoming fossil firms?

Turning off the (profit) tap. After a year of low oil prices and low demand that pushed most major oil companies into losses, the hit to profitability will continue in 2021 and 2022.

More information
allianz flags
allianz flags

The hot race for green tech dominance

For the EU, US and China, the Covid-19 recovery is an opportunity to accelerate in the race to dominate energy transition industries and boost sustainable growth.

More information
allianz flags
allianz flags

Bruised but not beaten, Europe’s textile industry is a perfect candidate for a greener and digital recovery

An unprecedented disruption in trade, manufacturing and retail activities, followed by a major economic crisis, will send the turnover of the European textile and apparel industry down by -19% in 2020, amid a -9% slump in GDP for Eurozone countries. We expect turnover to bounce back by about +15% in 2021 and return to pre-crisis levels only in 2023, assuming a progressive easing of the global sanitary emergency and substantial fiscal and monetary support to the economy. Despite the major relief provided by the various job-retention schemes and abundant funding, we believe that up to 8% of total industry employment (about 158,000 jobs) and 6% of companies (about 13,000) could disappear by the end of 2021. The share of SMEs in the textile industry’s total turnover is twice as high as the manufacturing sector average, making it more vulnerable.

More information
allianz flags
allianz flags

Oil: The floods

We expect significant volatility around our central Brent crude price forecast of USD 41/bbl as an unprecedented inventory build battles with a hope-driven news flow.

More information
allianz flags
allianz flags

Low for longer oil prices: Who is at risk?

The negative growth impact is increasing with the time oil prices will remain below 45 USD/bbl In particular, oil-exporting economies are likely to suffer with Ecuador and Colombia expected to lose more than -1pp of real GDP growth for a fall in oil prices of 10 USD/bbl. Mexico, Russia and the UAE are expected to lose more than -0.5pp. The impact from lower oil prices for Saudi Arabia remains more contained, at -0.2pp for oil prices falling by 10 USD/bbl given that the positive impact on growth from higher export volumes and inventories will largely counterbalance negative effects from reduced incomes and some fiscal austerity.

More information