FTSE 100 earn­ings es­ti­mates on the rise de­spite cor­rec­tion

Fu­ture di­rec­tion of UK's flag­ship in­dex to be driven by banks, oil firms and min­ers

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The FTSE 100 may be un­der pres­sure once more, as it fights to hold on to the 7,000 mark, but the good news is that ag­gre­gate earn­ings fore­casts for the UK’s bench­mark in­dex con­tinue to rise, if only steadily.

Pre-tax profit fore­casts for 2018 now stand at to­tal of £225.8 bil­lion, some 6% higher than they were a year ago, while es­ti­mates for 2019 are also show­ing pos­i­tive mo­men­tum with a fourth straight an­nual in­crease to £242.9 bil­lion the cur­rent an­a­lysts’ ex­pec­ta­tion.

With the FTSE 100 in­dex hav­ing fallen by 4% while profit es­ti­mates have ad­vanced 6% over the past 12 months the bench­mark has be­come cheaper. Based on con­sen­sus fore­casts the bench­mark now trades on just 13.5 times earn­ings for 2018 and 12.4 times for 2019 (com­pared the 18 times and 16 times mul­ti­ples cur­rently af­forded to Amer­ica’s S&P 500).

Div­i­dend fore­casts also con­tinue to rise, rather than fall, so the FTSE 100 now of­fers a 4.3% yield for 2018 and 4.5% yield for 2019, as­sum­ing that an­a­lysts’ fore­casts prove cor­rect.

This sug­gests that the unloved UK eq­uity mar­ket – reg­u­larly flagged as an ‘un­der­weight’ among fund man­agers in the sur­veys such as that car­ried out by Bank of Amer­ica Mer­rill Lynch – could be of­fer­ing some con­trar­ian value, at a time when value seems hard to find.

LOOK­ING FOR A TRIG­GER

The tricky bit is find­ing what could act as a cat­a­lyst that could per­suade in­vestors to re­assess the case for UK eq­ui­ties and un­lock that value.

Merger and ac­qui­si­tion ac­tiv­ity has yet to con­vince the doubters, de­spite a series of bids for FTSE 100 and FTSE 250 firms, in­clud­ing GKN, Sky (SKY), Shire (SHP) and a failed ap­proach for Smur­fit Kappa (SKG), which sug­gest that over­seas trade buy­ers see value in the UK even if fi­nan­cial buy­ers do not.

Nor is the ab­sence of net profit down­grades prov­ing enough, even if it com­pares favourably to 2014, 2015, 2016 and also 2017, when more write­downs and con­duct costs at the banks dragged the fi­nal to­tal down right at the end.

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