He believes that companies’ margin sustainability will be a key theme as we go through 2011 as they face the lagged impact of higher costs.
“In the long term, we argue that structural drivers of profitability are likely to turn from tailwinds to headwinds over the next decade, with European stocks heading to the upper end of their trading range,” he explains.
He is positive for European equities given the macro concerns at the end of last year and so far this are largely moderating, suggesting they will move to the upper end of their year-to-date trading range in the near term.
“Structurally, we prefer the risk/reward in defensives, but commodities and financials may see a period of tactical outperformance. We are also overweight energy and Insurance,” he added.
The impact of higher costs will also be negatively impacted by the weakening European economic conditions.
“Although net earnings revisions have been negative since March, consensus margin expectations still look too high to us. Net sales revisions have also dipped into negative territory,” according to Secker.
Secker’s conclusion for corporate Europe is: “Corporate profitability has been in a sweet spot for the past 20-30 years as companies have reaped the benefits of technological advances, a lower cost of capital, falling corporate tax rates, declining real commodity prices and a surge in outsourcing to lower cost geographies. Over the next decade these tailwinds are likely to become headwinds, we believe.”
