Prospects in the US are better, he believes, because of the heartening combination of profitable banking and affordable housing. For all the talk of LTRO and resolution to at least some of the eurozone’s inherent problems, it is still speculation at the end of the day while top-line change in the US is arguably more measurable.
But what about valuations? European equities are cheap, will stay cheap for the time being, and for good reason. Interestingly, James Butterfill, equity strategist at Coutts, points to a recent trend for equity earnings downgrades in the US – in this quarter analysts have downgraded expectations on seven consecutive weeks leading to a net 3.5% fall in the consensus bottom-up earnings-per-share (EPS) estimate. However, he thinks this paints an unduly gloomy picture with the consensus having become unduly bearish.
Aggressive downgrades
“This pattern of analyst downgrades has persisted so much over the last three quarterly reporting periods that bottom-up consensus EPS for full-year2012 for the S&P 500 Index of US equities has fallen 7.5% (a bottom-up earnings estimate is where individual company estimates are aggregated to create a whole index view),” he explains.
“Such aggressive downgrades in outlook over this period typically only happen in recessionary years. Indeed, markets have at various points over this period been pricing in a recession. However, given the trend of recent payroll data, employment rises, increases in PMI and industrial production data, recession in the US seems remote.”
The active management question
As discussed in my Opinion article last week, Europe still has plenty to offer, especially from its large cap multinationals, while a rosy dividend-paying season could soon bring savvy investors back into selective undervalued growth opportunities.
Arguably, you could also say that Europe is more suited to proven alpha-generating fund managers, especially when stocks are cheap, whereas the super-efficient US market is notoriously hard to beat. But then individuals like Odey are not held in such high esteem for nothing, and a change in his mandate is sure to prompt many of his devotees to follow suit.
