It performed poorly relative to Europe ex UK and World ex UK in 2012 and currently sits on a forward PE of 11.1x.
Banks produced another decent return during December and finish the year as the best performing UK sector. Miners saw a turnaround in performance in December and defensives such as beverages, food producers, tobacco and household goods suffered.
But the UK equity story has not been about large caps but mid/small companies, and domestically-exposed companies. The domestic-heavy FTSE 250 significantly outperformed the FTSE 100 in 2012. On our estimates the UK housebuilders put on 58% during 2012.
With the UK credit impulse being positive we believe we could continue to see better-than-expected economic data which should buoy the performance of these companies. The UK manufacturing PMI for December beat expectations by 1.5 points coming in at 51.4. We could be looking at growth moving back into positive territory in Q1.
In Europe, the DJ Stoxx 600 finished 2012 on 279. Back in November 2011 in our 2012 outlook note we set a target of 275 for the end of 2012 when the index was 221.
We are now looking for the index to rise to 315 by the end of 2013 and on estimated 2012 consensus earnings the Stoxx 600 sits on a PE of 12.7x.
After a strong showing in Q4 autos were the best performing Stoxx sector during 2012 and yet remain on a forward PE relative of just 68 (7.8x / 11.5x).
Autos’ 12-month forward consensus earnings per share was revised up by 7.3% through 2012 compared to a cut of 3.2% for the Stoxx 600. Perhaps not surprisingly the DAX also registered a decent performance in 2012.
December was marked by rebound in other cyclical sectors such as construction and basic resources. The strength in basic resources likely came on the back of the recovery in the iron ore price and the China PMI.
With a turn in the euroxzone economy looking increasingly imminent (Italy’s manufacturing PMI rose 1.6 points in December) we believe there are opportunities across both domestic and globally exposed cyclicals.
We remain overweight financials. We would fund this out of food & beverages, personal care & household goods, healthcare and oil which happened to all struggle during December.
