Strong Earnings Momentum in Materials
Global Sectors FVMR Snapshot – October 2016
Fundamentals
Heath Care is the only sector that delivers an ROE of above 20% globally. Consumer Staples and Info Tech get close, and rank second and third in terms of ROE.
Energy and Materials are expected to see improvements in 2017 following improvements in commodity prices.
Disregarding Energy that has faced low earnings due to low crude oil prices; Telecoms, Utilities, and Consumer Staples are the sectors to be invested in if you like a dividend payout ratio (DPR) of above 50%.
Valuation
Telecoms look most attractive when looking at the consensus estimates for 2016 PE and taking the expected EPS growth into consideration, PEG ratio at 1.3. Slow growth is, however, expected in 2017 for Telecoms. Materials look interesting at a 2017CE* PEG ratio of 1.0 (2016CE* PEG 1.6).
Telecoms look attractive at ROE/PB as well but Financials offer the highest 2016CE* ROE/PB of 8.5%. Defensive sectors, such as Utilities and Health Care also offer a decent amount of ROE for the PB you pay.
Momentum
The Energy sector is expected to rebound in 2017. Materials look attractive as earnings growth is expected to be solid in both 2016 and 2017. Consensus expectations are EPS growth of 11.5% in 2016 and 16.1% in 2017 for the Materials sector. Analysts expect all sectors to grow faster in 2017, Telecoms being the exception.
Price performance in the past two weeks has been strongest in the Energy sector, while Utilities performed poorly. Considering the one-year price performance, Info Tech and Materials are in top. If we were to rely on consensus estimates, the strong price performance could continue in those two sectors due to good growth prospects.
Risk
On a global level, Info Tech is the only sector that is net cash. In the past 12 months, the world as a whole has reduced gearing. Consumer Discretionary and Health Care are the only two sectors that have seen a slight increase in gearing, measured as net debt-to-equity.
Energy has shown the highest volatility on both a three-month and one-year horizon. Financials and Info Tech have been least volatile in the past three months.
*CE is Consensus Estimates
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