Please see the attached two pieces. The first, Why the market has further to rise, is an update of our market view. We remain constructive and have revised up our profit growth forecast for 2010 to 40% for the whole market which would put the P/E for 2010 just 10x. We upgrade our year end target to 260 from 235 for the DJ Stoxx 600 and forecast 275 over 12 months. We remain broadly cyclical in our sector stance. The second piece, Explaining our earnings forecasts, is a more detailed Q&A on our earnings forecasts. With the market up 50% from lows, many question the potential from here. As we move from a 2nd derivative improvement in activity to a 1st, we expect slower returns. But based on recent GDP revisions and higher earnings forecasts, we upgrade our DJ Stoxx 600 year-end target to 260 (from 235) and maintain a cyclical bias. Tracking previous recoveries Following the 50% rebound since March, many argue that there is little upside for the market from here. While we agree that the market tends to make its strongest returns while the economy is still contracting, albeit at a slowing rate (an improving 2nd derivative), it tends to make further gains as the economy begins to expand (the 1st derivative). Furthermore, the sharp recovery is not unique given the depth of the declines over the past two years and the market remains 25% below the pre-Lehman levels while our financial stress index is back to pre-September 2008 levels. Valuation and earnings upgrades support higher returns We have upgraded our European and global GDP forecasts recently and now expect 4% global GDP growth in 2010, well above consensus. This, coupled with higher financials earnings, has resulted in a further rise in our top down profit forecasts. We now expect net income growth pre-exceptionals of -16% for 2009 (-23% ex financials) and +40% for 2010 (+37% ex financials). This puts the market on 10x 2010 earnings on our forecasts. We upgrade our year-end DJ Stoxx 600 target to 260 (from 235) and have a 12-month target of 275. We retain a broadly cyclical bias We have made a few sector changes but retain a broadly cyclical bias. We have upgraded Banks to a modest overweight from neutral, Construction & Materials and Food & Beverages to neutral from underweight. We have downgraded Utilities and Technology from overweight to neutral. With other words : strong buy...
It's ironic how the market forced them to hike their year end target from 235 as DJ Eurostoxx 600 broke 240
We believe that the prospects for growth in the BRICs and emerging markets will remain strong and continue to recommend investors focus on companies that have high exposure to these regions. Our European BRICs basket, GSSTBRIC, has outperformed the broader European market this year by roughly 15%, but the companies are not expensive and we continue to favour the theme. As focus on top line growth becomes increasingly important, we think this has further to go. In this weekâs Strategy Matters, we show more details on the increased exposure of Europe to emerging markets and rebalance our BRICs basket. The main points are: We expect emerging economies to grow above trend in 2010. This strong performance should benefit European equities. We estimate that c.20%-25% of operating income is derived from emerging markets. We recommend going long European equities with the highest exposures through our BRIC basket (Bloomberg ticker: GSSTBRIC). An upbeat view on emerging economies Our Economists have a positive outlook on emerging countries in general and BRIC economies in particular for 2010. Hard data have already improved meaningfully and we expect emerging markets to be a source of growth for European companies. European companies have increased their exposure to EMs over the last decade We estimate that c.20%-25% of European operating income comes from emerging markets. This is likely to increase over time as European companies increase their capex in emerging markets. In addition, we find that operations in emerging markets seem to be higher margin than the part of business that is in the developed world. We update our BRIC basket (GSSTBRIC) and still recommend it Our BRIC basket has outperformed the Stoxx600 by 15% ytd. Considering the strong rebound in EMs and the positive economic outlook on emerging economies, we think that the basket should continue to outperform. Valuation is more attractive than for the broad market.
<u>Ever heard the street's saying</u>: The market has a big enough stick to teach anyone a lesson. Don't put them on too high a pedestal, for fear they might fall off. -troll