“Fat & Flat: The bull market since 2010 has been driven almost entirely by multiple expansion. We think valuations are now stretched and the European market trades at a 12-month forward P/E of 16.8x ex financials, similar to the US (at 17.4x) and we expect no further increase in P/E multiples from here. Profit growth is in Europe likely to be 8% in 2016 and 10% in 2017, supported by a weak euro and better domestic and global GDP growth. Our 12-month (end 2016) index targets are 400 for the SXXP and 3650 for the SX5E. For the SXXP this implies a return of 7.5% in euro and negligible returns in USD.
The need to differentiate: This year has been dominated by the underperformers (EM and commodities) rather than the outperformers. These themes remain in play but sustained underperformance and some moderation in fundamentals (softening imbalances in some EM and cost adjustments in oil) mean that greater differentiation within sectors and the themes is now required.
Five themes for 2016: We focus on differentiation within: 1) Commodities (we prefer oil to
mining), 2) Industrials (we prefer opex to capex), 3) Consumer (we prefer cyclicals to staples), 4) Income (we prefer income with growth to staples), and 5) EM (we prefer Consumers to Industrials).
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