Low valuations and the expectation of a second half recovery are leading investors to bet on Europea...
Low valuations and the expectation of a second half recovery are leading investors to bet on European industrials, according to Raj Shant, director of European Equities at Credit Suisse Asset Management.
The V-shaped recovery that many are expecting at the beginning in July may not happen. Shant says: "We are taking a defensive position and are banking on the fact that after the third quarter there should be good visibility of corporate and economic earnings."
Fiona Stoakes, investment manager at Britannic Asset Management, says: "Basic industrials and resources have been the best performers in Europe over the past months. Sub-sectors of the Bloomberg 500 index that have outperformed year to date have included the metals and mining index, auto parts and building materials.
"This has been as a result of the technology fallout and investors looking through the bad news until the second half. The basic industries have already seen earnings downgrades and are more underpinned than technology. There is the risk that there will not be a recovery in the fundamentals in which case the basic industries will suffer."
According to Shant, cyclicals have been outperforming until the past few weeks simply by default as investors have moved away from technology. Some investors have been attracted by the seemingly good valuations available in the sector.
Shant does not expect an improvement until at least the fourth quarter because the market is too tough and in a transitional period. He says: "We are now seeing a mixed performance as people are becoming more concerned about the European economy. Although metal and paper are performing well, some sub-sectors have come back sharply, such as engineering and autos, which have come off their high. Industrials will suffer as the US slows."
As interest rates are cut over the next few months, the pressure on the ECB to follow will grow, Shant says. Over the short-term, corporate profit warnings in the US will spread as corporate earnings revisions are very powerful, according to Shant. "We will see the sector improve as soon as profit warnings and the slow economy come to an end," he adds.
Stoakes says she hopes the second half interest rate cuts will start to kick in to the economy and improve demand levels.
"Industrial production will pick up because most people are betting on a second half recovery," she adds.
Although Britannic takes a sectoral approach to investing, Stoakes is relying on bottom-up processes in the current environment. She says: "We are not really looking for profit upgrades but for companies that are not issuing further downgrades.
"There are not as many positives for oil as last year because prices have come down a lot, but earnings forecasts are remaining secure. Opec is controlling supply and production, so the oil price is not falling and neither are the downgrades. Mining is down 10% but is looking positive because there is a lot of consolidation and a good supply with a rising demand in some metals."
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