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UK seen posting worst-in-class earnings drop in 2015

LONDON, Oct 7 (Reuters) – As earnings season kicks off after a dismal summer for financial markets, the bleak outlook for UK companies contrasts sharply with expected profit gains in the euro zone, the United States and Japan.

Top UK blue-chips are forecast to post a bruising 12.9 percent drop in earnings for 2015, according to analyst forecasts compiled by Thomson Reuters, much worse than the 12 percent increase expected in the euro zone and the more modest gains forecast for top U.S. and Japanese companies. (http://link.reuters.com/vaq45v)

Quarterly earnings data is not as comprehensive given fewer companies report on a quarterly basis. But Starmine data nonetheless points to an expected 30 percent third-quarter profits drop for 21 UK stocks in its country universe, compared with a 1 percent drop for 372 stocks in its euro zone universe.

The divide is all the more striking given Britain’s economy was the fastest-growing in the G7 group of major advanced economies in 2013 and 2014, and recorded growth of 0.7 percent in the three months to June. While there are signs that the recovery is losing steam, these are also being felt globally.

The main culprit is the UK market’s skew towards the energy and mining sectors, analysts say. The recent slump in commodity prices amid an emerging markets slowdown is set to take a near 50 percent bite out of profits for both industries, according to Thomson Reuters data. (http://link.reuters.com/was75w)

As bad as this year looks, investors may be positioning themselves for a turning point. Morgan Stanley on Wednesday recommended an overweight position in top UK blue-chips versus more domestically focused counterparts, arguing that improving newsflow in China would drive a rebound for emerging markets.

And even though Citi recently cut its FTSE 100 target for year end, the broker also said a turning point may be close and that UK equities had never looked cheaper relative to UK sovereign bonds in the last 100 years.

Britain’s biggest retailer Tesco offered one sign of promise on Wednesday: its shares rose despite a 55 percent slump in first-half profits after it said it was trading ahead of expectations and outperforming rivals after a move to sacrifice profits in favor of low prices.

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