Basic resources and oil companies continue to spiral upwards while the consumer driven sectors and technology continue to struggle.
Industry Performance
Source: FactSet Estimates
Earnings surprises are difficult to define however extremely useful when taken into context of price movements. In its simplicity, it is the broker consensus taken over the last 45 days before the company provides its result which is compared to the consensus 45 days after the event date. The 90 day window initially seems long but in reality takes into consideration the lag time it takes brokers to change their numbers. A reported EPS (earnings per share) number can be very different from an analyst EPS number. The difference usually lies in accounting for unusual items, goodwill and non-operating expenses. Consequently it is essential to compare things on an apple to apples basis.
Winners and losers
Source: FactSet Estimates
Outlook
Sectors sensitive to interest rates (financials) and cyclical industries that are not dependent on national growth rates (oils, basic resources and industrials) have been driving markets. However, it seems earnings estimate expectations are looking a little fragile while valuations are more or less aligning themselves to fair value. Consequently, caution is in the air and it might make sense of buying equities that align themselves with their respective index weights with its share of profits, like defensives in particular healthcare. World growth is expected to slow later this year which should also have an adverse affect on 2007 estimates.
I continue to believe that world stock markets will appreciate in line with earnings growth! Markets are still not that expensive with Europe trading at 13x forward earnings which is still at a 20% discount to its 10 year average.
M&A continues to be a major theme, however we believe infrastructure plays will be the flavour of the year. Instability in the Middle East could be the snag where once again the safe havens and oil could run the upward course.
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.