Quantitative analysis eases this burden. For example 2004 was a bumper year for most European countries in terms of earnings. DJ Stoxx 600 a good proxy for the European market grew 29%, and similarly the in UK, the FTSE All-Share grew 24%. However the main catalyst continued to be cost cutting. Top-line growth continues to be a central issue.
So how does 2005 pan out? The early clues clearly point toward European out-performance relative to US markets. Apart from lower long rates (10 year yields) in Europe relative to the United States, there is a substantial valuation differential. The price for 1 unit of earnings in the US is 20% more expensive than Europe. The UK more or less trades at a similar discount. More importantly the dividend yields in Europe which are a vital source of income for most retail investors continue to exceed the US by almost 1.5%.
(in local currency)
As opportunities in the US begin to dry up foreign investment flows will start driving the European markets in a big way. Particularly large Caps (please see Feb 25 Archive – Large Cap Opportunity), which are the most liquid for institutional asset managers. Market volatility, a very good indicator of investor sentiment has started to pick-up, up over 1% in the last month.
Where does the UK stake up? We believe the UK looks just fine on both a valuation and growth perspective. The Energy sector will be key as it continues to benefit from geopolitical risk. It will be another stellar half year for these companies. However, we have become cautious on the raw material sector. Although this sector has performed more than admirably we expect a short-term pull-back namely because of a marked slowdown in Chinese activity in 2006.
A good measure for stock picking this year will be high dividend yields, high sales growth and relative low valuation. Currently in the UK utilities, banks and insurance have the highest dividend yields. In terms of earnings growth mining, software and again insurance.
These views are independent of FactSet Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.