An admirable return (11.8% YTD) with strong profit growth is a European phenomenon that seems to be losing steam.
A key indicator of future market weakness is profit warnings. In short a profit warning is an announcement made by a public company in advance to its earnings announcement indicating that profits will fall short of previously market expected levels. The inverse is earnings surprise and clearly in this example Vodafone has been struggling up until the last quarter.
Vodafone Example
Source: FactSet Research Systems, Inc.
The market on the other hand hasn’t been improving. The FTSE All-Share (ex investment trusts), a good proxy of the UK market, is clearly showing cracks. Profit warning levels are the highest in the last 12 months and the November trend isn’t encouraging (10 which is already 25% higher than last year).
Source: FactSet Research Systems, Inc.
Outlook
So what’s the plan? 2006 in the bag! Buy growth at reasonable valuations seems to be theme running into the end of the year. Next year – be cautious! The optimal investment opportunities will lie in strong fundamentals, high dividend yields and low valuation. Stay the course with basic materials and start revaluating the oil sector.
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.