Despite the recent sell off following the escalation in the Sino-US trade dispute, global equities are still up double digits year to date with the UK market up around 9%. All eyes are on the direction of global growth from here. Equity markets rebounded from an overdone sell off in 4Q 2018, but to see continued progress from here, we will need evidence of the global growth backdrop stabilizing and even improving. Earnings reported by companies are one way to look at evidence of what's going on in the wider economy.
The UK equity market has only a small number of companies that report on a quarterly basis and so we must always take the results with a pinch of salt.
However, so far, of the companies that have reported first quarter earnings, the results have, on average, beaten consensus expectations by about 4%. Companies, however, have a degree of control over their earnings, through costs, and therefore to get a fuller picture of the economy it is best to look at sales growth. And here, sales slightly missed market expectations, declining 2% y/y. Earnings, however, grew 3% y/y for the first quarter. While this provides little comfort for the overall health of global growth, it does at least tell us that UK companies are, on average, seeing little margin pressure, which is reassuring from an equity market investment perspective.
At a sector level energy, healthcare, consumer services and financials all beat earnings expectations. Energy was boosted by a recovery in the price of oil and strong cash generation; healthcare beat, but the beat was of low quality, due to one-off items. Consumer services beat as UK real wages and retail sales remain stronger than expected. Financials meanwhile had generally better capital positions and better provisions, but mixed outturns on revenues and costs.
As earnings season continues, where does it leave us on the bigger picture? Consensus estimates 3% eps growth for 2019. We think there is a small upside risk from a global growth recovery and oil moving to 75USd/bl. However, currency could pose a downside risk if sterling strengthens. It's not a very exciting earnings outlook, but the UK market is priced for it. The MSCI UK trades on a 2019 P/E of 11.4x and a 12 months forward P/E of 12.4x (vs. a long run average of 14x).
Our preferred strategy within the UK is diversified dividends, taking a spread of dividend yield and dividend growth across a mix of cyclical and defensive sectors. This should allow us to navigate bond yield volatility. Meanwhile, taking a currency-aware position should help us navigate the outcome of Brexit, should one become clear.
The week ahead
This week brings the UK labour market report, which contains details of the latest unemployment rate and average weekly earnings. It will be published on 14th May.
The week in review
Last week saw BRC retail sales for April grow faster than consensus expected at 3.7% y/y, and the Halifax house price index grew 5% y/y. Decent numbers also for the preliminary 1Q GDP print, which showed 0.5% growth q/q and 1.8% growth y/y, a pick up on the weaker 4Q growth.
Author: Caroline Simmons, CFA, Strategist