Monday, 14 January 2013

Investors look forward to a new era of stability…

In the first week of 2013 the FTSE 100 closed above 6,100; a key technical resistance level which has been tested (but not breached) on a few occasions since May 2008. Similar positive technical themes are repeated elsewhere. For example the S&P 500 stands on the cusp of new highs since 2007, and is now just 6.5% from all-time highs.

The positive technical background is complemented by a useful fundamental background…
  • Monetary conditions continue to ease in the eurozone
  • The US housing market continues to improve
  • China shows signs of economic recovery
…although risks remain.
  • US consumers will suffer tax increases following the fiscal cliff resolution
  • The US debt ceiling and sequestration spending cuts are likely to create volatility
  • Eurozone unemployment continues to rise
Investors look to earnings…

All eyes at the moment are on the earnings season. Analysts had modest expectations going into this season given the downbeat guidance from third quarter releases. Investors, on the other hand, have begun to bake some optimism into their expectations. The price earnings multiple on the FTSE 100 (using our preferred twelve month forward blended measure) has risen 1.2x since Mario Draghi’s pledge to do “whatever it takes” to eliminate convertibility risk within the eurozone. That reflects a move from 9.9x to 11.2x earnings.

Since the end of 2009, during which time the market has lurched from risk on to risk off, the multiple has averaged 10.1 times. More >
Guy Foster
Head of Portfolio Strategy

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