The situation in the UK is still positive although not extraordinarily bullish: This is, in brief, the analysis provided by Kairos Partners managers upon their return from a series of meetings with UK funds.
Based on their discussions, the macroeconomic situation, which is highly favorable to equities, has led to a market re-rating, despite the fact that earnings forecasts have declined without stop from 2011 to date. Given this trend, valuations, now equal to roughly 12 times earnings, have returned to levels close to the long-term average and are no longer generally attractive. However, at the same time, the dispersion of returns has grown considerably. These indicators lead many observers to compare the 2013 market to that seen in 2004, 2005 and 2006 considering the combination of a rallying trend and the generation of alphas.
Many managers have increased portfolio turnover on the conviction that many stocks have already expressed their re-rating potential by now and from here on out growth in earnings is what will push rallies. Earnings stand to benefit from a recovering domestic economy, creating opportunities for the market leaders that manage to survive and prosper to the detriment of smaller companies in a period that bodes well for mergers and acquisitions.
At macroeconomic level, the more cautious analysts expect inflation risks to pose the gravest threat to the continuation of ultra-expansive monetary policy. The optimists – which is to say the majority of analysts – remind us that the economy remains well below capacity, as demonstrated by negative growth in real salaries. Accordingly, there is room for an increase in economic activity without consumer prices and interest rates necessarily reacting unexpectedly.
by Mario Unali – Senior Analyst Kairos Partners