Global EPS went up by 110% since its low level in June 2010, but lower than the 159% increase in the previous cycles. In addition, the global EPS remained dormant June 2011, according to the global equity strategy team at Citi Research.
Citi Research global equity strategist Robert Buckland and Anna Esposito together with their colleagues believe that despite the plateau of the global EPS, it would slowly move higher over the next 12 to 18 months, but they think it may not return to its highly-directional trends. They also believe that ongoing fears of double-dipping in emerging markets are over.
According to Buckland, Esposito and their fellow equity strategists, since there have been four complete global EPS cycles since the mid-1970s. The equity strategists noted that the fifth cycle started when the EPS went to the bottom in January 2010.
Upward cycle of the global EPS
They observed that the upward cycle of the global EPS lasted more than 6 years and climbed 159%, which is equivalent to an annual growth rate of 18%. They explained that a short and sharp downturn of an average of 39% occurred after every upward cycle of global EPS.
Buckland and Esposito along with their colleagues found out that the longest EPS up cycle happened in the 1990s (7 ½ years) and the shortest was in the 1970s (4 ½ years) while the biggest happened when the EPS increased by 244% from 2002 to 2007. According to them, the upward movement during the 2000s was remarkable because there was no pause and it just went straight up.
The global equity strategist said that the current global EPS cycle is different because it started with the fastest increase, which is 110% higher within 18 months. According to them, it took 4 years to the global EPS to double during the 1970s, 1980s, and 1990s cycle.
Rebound of the global EPS
Based on their evaluation, they believe that the strength of the initial rebound of the global EPS was due to a huge decline (57%) of earnings during the 2008 t0 2009 recession. They emphasized that global EPS doubled because it dropped by more than 50%, but noted that the MSCI AC World trailing EPS index is still has not reached its previous high. Apparently in the previous cycles, the previous global EPS peaks were surpassed within three years after the beginning of recovery. At present, the global EPS is still 10% short of the highest-level four years ago.
According to Citi Research global equity strategists, global EPS will resume its upward movement over the next 12 months based on a consensus forecast. The average estimate was an 11% increase in global EPS this year, then another 12% gain in 2014. The expectation is consistent with the 1980s and 1990s cycle. However, the strategists advised investors to treat the projections with caution given the fact that analysts have consistently overestimated growth over the past three years. They emphasized that they failed to see the plateau of global EPS coming.
Buckland, Esposito and their colleagues said, “For now, the double-digit growth projection for 2013 looks robust. But most of the downgrades to the 2011 and 2012 forecast occurred in the second half of the year, so it is too early to say that analysts will be proven correct.”
They added that less directional global EPS trends allow for more appropriate stock-picking and the trends become a significant factor for country pickers. They observed that the consumer discretionary and financials sectors experienced the strongest EPS momentum.
