market continues on its volatile, rocky road and shows no sign of letting off as year ends
Value in European equities, on either the long or short side, remains difficult to find in an increasingly volatile market.
The extreme and unpredictable intra-day movements seen in the market have left Roger Guy, manager of the AlphaGen Capella fund, with high cash weightings throughout much of the year.
He has had low gross and net exposures to the market through- out the year because he felt he was not being paid to take the risk of being in the market in the current climate. With no real direction to market movements, Guy has an extremely cautious approach and cash levels have been high.
Instead of improving as the year winds down, Guy said market volatility is getting worse, both on the long and short side of the market, making it difficult to take big positions.
The annual low liquidity around the holiday season is sure to exaggerate the existing extreme volatility, making Guy increase cash even further over this time, with an eye to reinvest in the new year.
Looking ahead to 2003, Guy believes the worst of the equity falls have been experienced, but said a lot of uncertainty remains in the market, and feels investors and analysts are far too optimistic about earnings forecasts.
While finding value in the market has been a constant hunt in 2002, Guy said there are a few sectors that look attractive.
Autos is one such sector that he said looks good value now, and there are some defensives that have come back down to interesting levels, having suffered over the past three months.
Agreeing problems in Germany have caused concern, Guy noted his underweight position to the country is on a stock-specific basis rather than a country call. Michael Hughes, senior product manager of European equities at JP Morgan Fleming Asset Management, which has recently launched a European hedge fund product ' its first in this market said the volatility seen has been extreme.
However, he added the process of correction has been largely played out and thinks individual markets such as Germany should see a return to more normal levels. 'The volatility in Germany has been above trend, trading at levels comparable to emerging markets, so you have to assume there will be a reversion to trend as the markets become more rational.'
Hughes believes it will be a while yet before he can be comfortable calling the end to the bear market. Three things need to be seen before the start of a bull market, he notes: good valuations, good sustainable company newsflow and better and sustainable macro environment.
While the valuations are looking good, Hughes does not believe the market is there yet on the other two points and the rally seen in the past few weeks has merely been a bear rally.
The JPMF European hedge fund aims to be market neutral and holds a high number of both longs and shorts, at 200 a piece on average.
Using the JPMF investment process of analysing the growth and value elements in the stocks, the managers arrive at their long positions by favouring companies with characteristics in terms of earnings per share growth, earnings per share revision and 12-month price momentum.
Its universe of stocks is pared down through analysis and ranked, and the managers will then go long those ranked the highest and short those at the bottom of the list, Hughes said.
One company he cites as a good long position is UK house builder Barrett, which is on a P/E of six to seven times. Valued at a huge discount to the market and showing earnings surprise, this is an example of a stock he says fits both the value and growth characteristics the managers are seeking on the long side.
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