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Director’s Cut
Looking for lows in revision ratios
Global equity markets look cheap on forward earnings, with the MSCI AC World
index currently at 10.4 times, roughly 30% below the 10 year average. The
reason why markets look so cheap is that investors increasingly doubt the ability
of companies to deliver the forecast earnings in the current environment.
The weakness in earnings expectations is reflected in analyst revisions, which
have been net negative since March 2011. With growth slowing in key markets,
and global operating and net profit margins both close to the peak levels seen
prior to 2008, there is a risk this downtrend in revisions could continue.
For investors to have confidence in forward earnings, we will need to see a low
in the revisions ratio. If you look at the 2008/09 experience, analyst revisions
bottomed near 0.25 in December 2008, which was three months in advance of
the market’s low in March 2009. In that case, fiscal spending and monetary
stimulus was a trigger for upgrades. This time it would probably be a resolution
to the sovereign crisis, although this is not expected in the near term.
Looking across regions, the revisions ratio in North America is 1.2, which means
there are still more upgrades than downgrades! This contrasts strongly with
Europe at 0.5 and Emerging Markets at 0.7. In this light, while we prefer US over
European equities in the current market, there is likely greater downside risk in
the North American revisions ratio compared to other regions.
Global equities look cheap on forward earnings, but we need to see a
low in the revisions ratio for investors to have the confidence to act
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Director’s Cut
Looking for lows in revision ratios
Global equity markets look cheap on forward earnings, with the MSCI AC World
index currently at 10.4 times, roughly 30% below the 10 year average. The
reason why markets look so cheap is that investors increasingly doubt the ability
of companies to deliver the forecast earnings in the current environment.
The weakness in earnings expectations is reflected in analyst revisions, which
have been net negative since March 2011. With growth slowing in key markets,
and global operating and net profit margins both close to the peak levels seen
prior to 2008, there is a risk this downtrend in revisions could continue.
For investors to have confidence in forward earnings, we will need to see a low
in the revisions ratio. If you look at the 2008/09 experience, analyst revisions
bottomed near 0.25 in December 2008, which was three months in advance of
the market’s low in March 2009. In that case, fiscal spending and monetary
stimulus was a trigger for upgrades. This time it would probably be a resolution
to the sovereign crisis, although this is not expected in the near term.
Looking across regions, the revisions ratio in North America is 1.2, which means
there are still more upgrades than downgrades! This contrasts strongly with
Europe at 0.5 and Emerging Markets at 0.7. In this light, while we prefer US over
European equities in the current market, there is likely greater downside risk in
the North American revisions ratio compared to other regions.
Global equities look cheap on forward earnings, but we need to see a
low in the revisions ratio for investors to have the confidence to act
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