Leading indicators are always a good gauge of the financial health in an overall economy even more so in the US. Interestingly our findings in the US consumer credit availability have been a turning point contributing to about 5-6% of the GDP (Gross Domestic Product). In this framework US growth in the past 60 years has turned negative every time the contribution of residential investment to US GDP growth has done so. We are seeing this now!
You are probably asking yourself what does this mean for the UK? Is the US really a leading indicator for the world economy especially as the emerging economies are driving so much growth? Unfortunately, the situation remains the same where the US economy accounts for over 20% of World GDP. More telling is the correlation between US and European growth which stands at about 80%. What this means is that a significant portion of UK growth is dependent on the fundamentals in the US. Stats 101: Correlation is a single number that describes the degree of relationship between two variables. The stronger the number towards 1 or -1 the stronger the relationship.
In our last article the focus was on profit warnings and clearly we found an upward trend. This week the focus is on earnings revisions and clearly they are waning.
The FTSE All-Share (ex investment trusts), a good proxy of the UK market, is clearly showing cracks; 1 month profit revisions down -1.2% and 3 month profit revisions down 1.7%. Trends in the US are similar and we believe the revisions could become deeper as the US property downturn is fed through household consumption.
Outlook
We continue to maintain our hypothesis for the UK. Buy stocks with the highest 3 month profit revisions with reasonable valuations and sales less susceptible to the US market. Stay the course with non-cyclicals and utilities.
These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.