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
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.