2016 Outlook: Faith in the future
We think investors are going into 2016 with very little faith in the future. Rather than the
ubiquitous 10-12%, bottom-up forecasts for 6.5% EPS growth in 2016 are the lowest
they have been on record, aside from forecasts made in Dec 2008. Our model suggests
EPS growth of 12% in C. Europe and 8% in the UK. For those who think this is too high,
we would point to the current run rate of 14% ex-energy and materials. We forecast a
total return of 13% from current levels.
While European equities feel like a consensus “long”, overseas inflows have moderated
considerably, and Euro Area households still have over 34% of their financial assets in
cash. Risk appetite is depressed: “quality” trades on a recessionary-scale premium, while
both “value” and “growth” are discounted. Unusually, Europe’s best growth stocks trade
on the same multiple as those with more mediocre prospects – more evidence of
investors’ lack of faith in the future.
At the “value” end, there is little hope that high dividends will be sustained, or indeed, that
earnings of more cyclical companies will recover. This would be more understandable, if
ECB QE was not “working”. Yet money growth and bank lending are accelerating, while
business confidence remains resilient.
We overweight Financials, Cyclicals and Telecoms. We have also added exposure to
Energy at the expense of Materials. We underweight Staples, Healthcare and Utilities. At
the stock level, we add ABB, Aviva, ASML, BP and Boliden and remove Arcelor Mittal,
Total, Whitbread, Schroders and Voestalpine.