LET’S face it; for most of the rally off the 2009 lows, equity investors could have got a decent return from buying just about any mainstream index. It’s been pretty much one-way traffic and even the most inept of investors could be sitting pretty on a big double-digit return. But is the going about to get a lot tougher?
To recap, the S&P is up circa 95 per cent from March 2009, the Euro Stoxx 50 is up 22 per cent ahead of its twelve month low and our very own FTSE 100 has gone up 16 per cent in the last 52 weeks. So far, so good – but the current earnings season may be proving that the time to be a little more stock specific could be upon us.
This past week has seen a whole host of disappointments for the market: from Cisco to Air France-KLM, from Nokia to L’Oreal. In the UK, Diageo fell last week as sales missed taregts on the back of the economic woes of Greece, Spain and Ireland.
So are the wheels falling off the earnings story? The answer, by and large, is a resounding “no”. If, for example, you look at the US reporting season so far, 71 per cent of companies have beaten forecasts, according to Capital IQ, a market analytics research group. Capital IQ says this is being led by a strong performance from the financial sector. In fact, virtually no sector is showing a net miss on numbers.
The problem appears to be an asymmetrical response from the market when looking at beats compared with misses. UBS strategist Nick Nelson pointed out to me last week that companies beating expectations in Europe are being rewarded with a 3.06 per cent rise in their share prices on average on the day or reporting. However, companies missing are being hit by an average 5.43 per cent fall. The conclusion is clear – investors are getting fussier. They want more bang for their buck.
In its most recent report on the European earnings season so far, UBS reports: “We are now approaching halfway through the season, and the developing trend has been of consensus expectations catching up with the early positive reporting, leading net reporting to nearer to in-line.”
Nelson believes though that the top line growth story for companies remains strong, but it is the capex increases coming through to the bottom line that are hurting for some companies.
Higher costs are materialising for companies across the board but it is the ability, or lack of ability, to pass them on to the consumer that is the key. The nearer you are to the consumer, then the harder it is to pass on price increases. That, at least, is how the logic goes.
So while it’s not exactly the moment to call time on the equity market rally of the past two years, with much of the easy money now well and truly in the price, it is undoubtedly time to return to good old – and tricky – stock picking. How inconvenient for most of us.
Steve Sedgwick is a presenter on Squawk Box Europe each weekday morning on CNBC.