** THOUGHTS FROM THE FLOOR ON EQUITIES **

It was an interesting week once again. Equity markets around the world reversed most of last week’s losses and retested previous highs or better even broke out to new highs. This occurred despite rising yields and firmer commodities prices.

 

With many companies reporting earnings last week, the score card so far looks pretty impressive. According to Bloomberg, almost 50% of S&P 500 companies reported earnings with only 20% of them surprising negatively. The bulk (63%) managed to show better than forecasted Q4 earnings which on average grew 12.8% versus a year earlier. Our feeling is that the reports out of Europe and Asian certainly weren’t worse than the ones out of the States. Conclusion: corporations are still going strong which helps share prices. 

 

 

 

Looking at sector earnings, the bulk of the growth is once again coming from energy companies. The S&P 500 Energy sector (of which 38% of companies reported so far) showed a 58% year-on-year earnings growth in the fourth quarter of 2005 according to Bloomberg. Next best in line are Telecoms ( +22% yoy) and Technology (+19% yoy). Weakest sectors in terms of earnings growth in Q4 are Consumer Discretionary (-17% yoy), Utilities (+2% yoy) and Healthcare (+2.3% yoy). Conclusion: not all corporations are doing well which underlines the case for stock picking going forward. 

 

Besides good overall corporate earnings, M&A activity continues to be very strong. According to Bloomberg data there were 732 deals announced in the U.S. (totalling a value of $ 88bn) since the beginning of this year of which only 20 deals involved more than $1bn total value individually. In Europe we’ve seen 457 deals being announced since the first of January (total value $66bn) of which only 8 were above the $1bn deal value. We believe cash rich corporate balance sheets and the growth of funds directed to private equity funds are fuelling this trend that is likely to continue in 2006. Given the large number of small- and midcap companies on these lists, we think that these smaller sized companies will continue to outperform their large cap peers (despite this category looking relatively expensive compared to large caps).