City Watch: Earnings growth will be vital for shares in 2014, says Mark Marshall
After a year in which share values rose across the board, partly due to expansion in the price/earnings multiple, any further progress in 2014 will need to be underpinned by earnings growth to justify current valuations and allow sufficient margin to sustain the second leg of the bull market.
Last year, share markets rose despite a persistently negative tone arising from corporate earnings and while official data gives an impression that Western economies have emerged from recession, this has not yet translated into an improvement in corporate operating performance.
Investors are pinning their hopes on the forthcoming results season. This, it is hoped, will mark the trough for earnings downgrades, following which the cyclical economic revival will kick in to deliver the long-awaited improvement.
Thus far, earnings weakness has been detected in three admittedly large sectors (Mining, Telecoms and Utilities) all of which are heavily weighted in the FTSE 100 index. Following a hesitant start to 2014, Western benchmark indices have recovered their footing and are making upwards progress again.
The outlook is that the developed world will enjoy another year of cyclical recovery which may well be focused on the eurozone which is hardly running on all cylinders. Nevertheless the MSCI Europe index trades off around 13.3 times anticipated earnings, a premium to its 10 year average. The same factors are at play in both UK and US equity markets which stand close to multi year highs.
Undaunted by past earnings disappointments, consensus earnings are expected to climb in 2014. Given that so much uncertainty surrounds the likely pace of the cyclical revival, it seems prudent not to place too much faith in the markets ability to deliver against expectations, based on everything going right and little going wrong.
: : Mark Marshall is an investment manager with Charles Stanley & Co in Ipswich.