Mott warns on ‘wildly optimistic’ UK earnings growth forecasts

PSigma’s Bill Mott has warned earnings growth forecasts for UK companies are far too high, while equity markets have reached a peak and are set for a correction.

The manager of the £450m PSigma Income fund predicts UK earnings will grow 6%-8% this year, below the consensus forecast of 11%. He said slowing economic growth will drive earnings lower, and predicts GDP growth of below 1%
for 2012. 

“The aggregate forecast for 11% earnings growth in 2012 looks wildly too high. Until we can get a clearer handle on how QE is going to unfold, we will stick with our defensive positioning,” he said.

“The FTSE 100 may have gone up a couple of hundred points since the turn of the year but it is not sustainable. Quality has been sold down and the cyclicals, the likes of banks and miners, have rallied despite the ongoing uncertainty.”
The PSigma manager expects the market will be range-bound this year.

“Throughout the year I believe the market will swing between 5,250
and 6,000. It is now trading near to the top of its range and will struggle to break through the 6,000 cap owing to the continued economic uncertainty.”

Mott does not expect the FTSE to fall below 5,250 as growing yields will keep valuations strong and underpin the level of the market, he said.

On the income front, Mott forecasts underlying dividend growth of 10%, against the 11% expected by Capita Registrars, and also anticipates a number of special dividend payments as balance sheets are in strong order.

Last year Mott’s defensive stance paid off, and his fund produced top-decile performance despite turbulent market conditions.

The fund has returned 4.7% over the past year, beating peers in the IMA UK Equity Income sector, which fell an average 0.3%, according to Morningstar.