In the first quarter, the broker said, consensus forecasts were for 5% organic growth in the 2016 financial year. This was much more bullish than the firm’s early cycle indicator (ECI) which measures PMI data and, the firm said was pointing to 1% growth.
“A weak H1, reinforced over the Q2 results season by cautious management comments, has seen the gap close; the 3% growth now expected by consensus next year is the same as the 3% growth that our ECI has been suggesting since April.
According to Liberum there is a greater than 80% correlation between readings from its ECI and early cycle organic growth.
However, while the gap between the ECI and net earnings revisions continues to narrow, the firm is not yet bullish on early cycle stocks.
Part of the reason for this lack of conviction is that the gap between the ECI and net earnings revisions was closing from its widest point in 15 years, which it hit last summer on the back of foreign exchange driven earnings upgrades and early cycle recovery hopes, which Liberum said, appear premature based on its ECI and a disappointing Q1 earnings season.
It added: “Our ECI is highly correlated with early-cycle organic growth, with a 6-9 month lead; the drop in the indicator post summer 2014 has been followed by 2-3 quarters of slowing growth. The ECI remains consistent with muted growth, but we await a pick-up in the indicator before becoming more bullish on early cycle stocks.”
