Equity markets fell sharply during September, partly reflecting a loss of confidence in the aftermat...
Equity markets fell sharply during September, partly reflecting a loss of confidence in the aftermath of the terrorist attacks in the US but also as numerous companies announced statements that confirmed the severe weakness in economic and corporate conditions globally.
Year to 28 September, the FTSE Eurotop 300 Index returned '25.10% in euro terms.
The long-term case for European equities, driven by changes in savings and pensions, looks intact. However, the European economy still looks linked to the US and global slowdown, with stock markets performing just as badly. Lower interest and inflation rates may result in lower absolute returns in the future, with increased stock market volatility.
The investment environment favours stockpicking. Getting good returns in Europe will need vigorous investment analysis.
The weakness in the US and Japanese economies will impact European economies. Earning projections in a wide range of sectors have become less visible. Sectors and stocks that benefited from the market's nervousness included defensive growth stocks and stocks with more visible profit patterns. Oils, electrical utilities and retail stocks have been among the strongest relative performing sectors.
Overcapacity problems in areas such as telecom infrastructure, appear more medium-term concerns than short term. Companies in high debt sectors, such as telecom and information technology, will require stronger markets to issue new shares or sell non-core parts of their businesses in order to fund future growth. This urgent need for financing from a wide range of companies suggests a range-bound market over the next six months, as companies take advantage of any improvement in markets to raise cash.
Key to market direction will be indications of an economic pick-up, particularly in the United States. Evidence of this would help Europe look beyond the short term, which will be characterised by weakening economic and corporate news.
Stocks with greater visibility in earnings and less exposure to an economic slowdown should still form the core of a European equity portfolio. Information technology stocks, media stocks with high exposure to advertising and telecom stocks continue to be in the danger category. However, that leaves a large part of the market where investment opportunities are available. A mixture of growth and value is available in support service stocks, subscription-based media stocks and the oil sector.
Selected healthcare, pharmaceuticals and financial stocks also offer growth at sound valuations.
In summary, European markets continue to offer good medium to long-term prospects as a result of a growing equity culture and the potential for efficiency improvements to benefit corporate profitability. Equity markets will also show diverse individual corporate performance, greater volatility and lower absolute returns. All of these will give the active manager more opportunity to achieve above-average returns.
Positive medium to long-term outlook.
Increased opportunities for active managers.
Pharmaceuticals and Healthcare look good.
US global slowdown driving short-term focus.
Effect of overcapacity and high debt.
Few signs of US pick up.
Michael Nicol is a fund manager at Scottish Value Management
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