Traditional economy stocks are a less obvious value play than in the UK because they have not fallen...
Traditional economy stocks are a less obvious value play than in the UK because they have not fallen as far behind the tech, telecom and media companies.
A major reason for this difference between the UK and the Continent is a technical one, based on the Vodafone and Mannesmann deal.
Jeff Currington, head of European equities at Norwich Union, says: "UK institutions had to increase their exposure to telecoms at the expense of selling traditional companies. This did not happen in Europe, and the absolute share price performance has been quite good, so there is not the same degree of value as there is in the UK."
Stephen Peak, fund manager at Henderson Investors, points to a further reason.
He says that while both markets have been exposed to the same global trends, traditional UK companies have had to cope with the strength of sterling while European companies have benefited from the weakness of the euro.
Between 1 September 1999 and 29 February 2000 the engineering and machinery companies sector in the FTSE All-Share fell by an average 10.5%, while the same kind of companies in the FTSE Eurotop 300 index grew by 3.58%, both on a sterling basis.
During the same period UK software and computer services companies were up 153% compared to their European counterparts advancing 83%.
Currington sees room for value plays in the traditional sectors of the European economy, although he says it is not as obvious as in the UK.
His favoured sector is chemicals, which has been affected by the rising oil price. Currington says: "As the rise in the oil price is clearly visible, chemical companies find it relatively easy to pass on their rising costs to their customers. Looking forward, the companies will benefit from the continued recovery in Asia and the anticipated growth in Europe."
Norwich Union has exposure to the French chemical company Rhodia and the Dutch stock Akzo Nobel.
Both companies are favoured partly on valuation grounds, but also on the respective managements' ability to achieve cost cutting targets. Currington adds: "In the case of Akzo, it also has a pharmaceuticals subsidiary which has a number of new products coming to the market."
As a whole, Norwich Union is negative on the financial sector due to the challenge many companies face from the emergence of internet banking.
But some look attractive to Currington, in particular Credit Suisse and ING Group. He says: "Their size means they will be able to cope with the competition, and both companies are developing internet strategies."
Peak's strategy when looking for value stocks is to look at old economy companies with old economy prices, but which have a new economy angle. A typical stock here is the Spanish company TelePizza.
Peak says: "Managers realised that they had lots of mopeds standing around during the day which could be used. At the moment, the company is talking to companies similar to Amazon.com to see if it can serve their distribution needs."
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