The strength of the market rally since the middle of March has caught many investors by surprise. ...
The strength of the market rally since the middle of March has caught many investors by surprise. What began as a 'Baghdad bounce' has developed into a fully-fledged relief rally, sending the remaining bears running for their caves to sit and wonder what it's all about. The Eurostoxx 50 increased by 27% from 1914.3 on 11 March to 2433.9 on 23 March.
So far the rally has been fairly narrow. The best performing stocks and sectors are currently the ones that fell the most over the course of the previous year. Technology, media and insurance companies led the way as investors chose to ignore signs of financial and operational weakness in favour of a more optimistic outlook for growth in the second half of 2003 and 2004.
Fundamentally this approach does have a measure of support. Having been universally weak, some economic indicators have begun to show improvement. It is too early to call an upturn in global economic growth but the prospect is not as distant as it once was.
However, a word of caution is needed. If the current equity market rally is to be sustained, it must broaden out and establish a base founded on improving fundamentals and valuations that allow room for growth.
Relying on just a few sectors to provide gains and chasing stock prices to levels at which even the most bullish earnings forecasts cannot support valuations is what got investors into trouble during the technology bubble. Simply repeating this process three years on is not going to solve the problems that persist in many sectors, nor is it going to provide investors with an acceptable measure of risk-adjusted return. So the key question must be: how do investors make money from here?
We believe the key to navigating this process is to focus on individual stocks rather than make top-down calls on macro issues. Macroeconomics is important but should not be over-emphasised.
Restructuring is also a feature at company level and it is happening as we speak. There are many world-class companies in Europe, driven by management teams that constantly aim to improve their competitive positions, grow cashflow and deliver shareholder value.
The key to successful investing in Europe is to be pragmatic and focused on finding these companies as well as constructing a balanced portfolio based on strong ideas and conviction.
We are currently finding value in financials. Some insurance companies that have taken advantage of cheap capital to rebuild their balance sheets offer attractive returns to new investors, as do selected commercial and investment banks, where key franchises are combined with strong market positions and balance sheet strength.
We also like the cash generative nature of the oil sector and are confident these stocks will perform well now the macro issues overhanging the sector have diminished.
Some exporters are being hurt by the strength of the euro against the dollar but overall we are cautiously optimistic and will resist overpaying in the short term for stocks we believe will not last the distance.
Interest rates are supportive.
Cost control improving corporate returns.
Valuations leave room for further upside.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till