Here’s more from the 2013 outlook book. This time we get three bullish factors for stock from Morgan Stanley:
“In our 2013 outlook piece (see 2013 Outlook – Double Digit Upside, November 26, 2012) we outlined three factors that would likely determine European equity performance over the next 12 months – 1) Economic growth; 2) Corporate margins and 3) A change in the PE ratio. Over recent weeks, we’ve seen some encouraging newsflow around these three factors.
1) Our Global PMI is at its highest level since April – Our Global PMI series, which is a combination of Euro area, China and US PMIs weighted by the geographical revenue split of European companies, has risen to 49.8 this month which is the highest level since April. Over the past year, we have been highlighting the close correlation between our Global PMI and the performance of MSCI Europe. Our economists’ Euro area surprise gap index has recently moved out of recession territory too. The economic data out of China last week affirmed our economists’ view that a growth recovery is on track. The G10 economic surprise index has resumed its upward trajectory after a modest pullback in late-October.
2) The recent outperformance of commodities over Oil is a positive for corporate margins – Although we are not arguing for margin expansion in 2013, we do believe that the pace of margin decline has troughed. Our proprietary Margin Lead Indicator is pointing to close-to-flat margins next year. The recent fall in the oil price relative to other industrial commodities should be viewed as a positive for corporate margins and global growth in general.
3) The 12m forward PE in Europe has risen above 11x – The 12m PE in Europe has risen to 11.3x for the first time since April 2010. Back in April 2010, economic indicators were peaking, the uncertainty over the European policy situation was rising and European mutual funds were seeing equity outflows. This time economic indicators appear to be troughing, the tail risks around the European policy front (appear to) have been significantly reduced, core bond yields are nudging higher and European mutual funds have stopped seeing equity outflows. These factors lead us to believe that the PE could rise further to our base case assumption of 12x in 2013.”
Source: Morgan Stanley
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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