Steady as she goes
Mainland Europe has been largely overlooked in the apocalyptic scenarios cooked up for the US and the UK. It is generally accepted that it isn’t facing the same kind of meltdown, but the region’s steady-as-she-goes, invest for the long term philosophy has been overshadowed by the white heat of industrialising China and India.
Perhaps slow, steady growth is just not worth getting worked up about. But ABN Amro recently released research in association with the London Business School* which found that it was low growth countries that did best over the long term, whilst emerging markets only outperform in the short and medium term. Yes, it sounds like heresy, but 108 years is a long time in economic history. Meanwhile, we have more pressing problems.
Trying to manage through the current volatility is proving a headache for managers. “These are very volatile markets and have been for some time. From one day to the next, any company can get taken apart by the markets,” says Tim Stevenson, portfolio manager of the Henderson EuroTrust. “Valuations are attractive but investors need to be patient. I am anticipating a period of below trend growth. But although I am nervous for the next two to three months I see that as an opportunity to get involved.”
Robert Quinn, European equity strategist at S&P, says that European equities appear to be in the throes of an ongoing whipsaw market, in which investors seemingly convinced by events on the spur of the moment find themselves less so after more mature reflection.
In his view, the indiscriminate nature of the sell off in January, where utilities suffered the steepest declines, suggests a rotation out of asset classes. Quinn identifies potentially oversold positions in industrial, capital goods stocks – a sector also tipped by the managers interviewed for my recent focus on European equities. This sector fell by 30 pct from peak to trough, despite robust order intakes and order books, equal to a backlog of several years in many cases, says Quinn.
“Many capital goods stocks have been hit disproportionately versus historical standards, with companies in the sector in a better position today than in recent downturns to weather more moderate conditions,” he points out. Order books are strong as investment activity is continuing in many customer segments, with emerging market demand providing further support. “Cost reduction efforts will remain the key factor in maintaining margins, although it is questionable how much of this has already been discounted by the market,” Quinn says.
Stevenson also tips outsourcing companies such as Adecco, which supplies temporary workers. “There is a shortage of skilled workers around. It might suffer if there is a heavy recession, but this is already reflected in the valuations,” he says. Other attractive stocks include Sodexho, a catering company that is highly cash generative, and Maersk, the shipping company.
Despite the spectre of inflation, Stevenson remains fairly sanguine about the European economy this year, arguing, tongue in cheek, that growth will be boringly weak as opposed to boringly strong. “The key is to prevent wage inflation. It’s possible to create an Armageddon scenario where the US goes into a serious decline and the dollar becomes a problem for European exporters. But I think we will see lower growth rather than a recession.”
Quinn takes a gloomier view on market direction. “The perverse situation we find ourselves in now is that the market has traded the recession card so aggressively, with a consensus hardening around no immediate data, that it is vulnerable in the near-term to positive news flow. Our advice is that any such uptick is likely to prove a false dawn,” he says.
In particular, before the market’s ratings and earnings recover, he believes we need to see some negative news flow regarding the increase in default rates across the credit spectrum (such as auto loans or credit cards), as well as the release of “several challenging quarters of macroeconomic data”. This is not expected to happen before autumn at the earliest, suggesting that managers will have to suffer through several more months of wild swings and knee-jerk sell offs.
You can read more about European equity managers’ stock tips at:
http://www.thomsonimnews.com/story.asp?sectioncode=7&storycode=36755
* ABN Amro Global Investment Returns Yearbook by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School and Rolf Elgeti, consultant.
