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Highlights from the latest ‘European Investment Policy Committee’ note from S&P Capital IQ Equity Research:
- 2014 and the rest of 2013 will likely be defined by the strength of an earnings rebound. We anticipate that many cyclical subsectors will lead this rebound via margin recovery, higher economic activity driving both consumer and industrial demand and, for Continental Europe, forex support. Many leading indicators have improved materially since April, with some investors nervous that the cyclical outperformance over defensive peers is over. The ‘early cyclical’ phase is indeed likely over, and also included an element of catch-up following the weak Q1 outturn, but leading indicators are a better buy signal than sell. In our view we are about to enter a new, normalised cycle where economic momentum does become more lumpy but where reactions should be more contained.
- As economic indicators start to approach escape velocity levels, we are finally starting to see upgrades to consensus earnings expectations. It has been a long, multi-year wait but returning corporate profits, alongside availability of credit, are key determinants in both the capex cycle and labour market intentions.
- We upgrade both Autos & Parts and Media on expected superior relative earnings momentum. Car purchases are around early 1990s levels across Europe, at a time when EU consumer confidence is on a new upward trend while global advertising spending growth is set to double in 2014. We downgrade Food & Beverages to underweight as its record premium valuation is no longer justified alongside weakening relative earnings strength.
- We maintain our SXXP targets of 325 and 375 for end-2013 and end-2014, respectively. We believe the two-year earnings downgrade cycle is over and we assume 3% and 9% EPS growth for 2013-14E
To read the report in full or speak to Rob Quinn, Chief European Equity Strategist in more detail about his views, please contact: AllCDRSPCapitalIQ@citigatedr.co.uk
