By Stuart Gilmartin, a fund manager at SGAM Last year was one of the worst the eurozone has suff...
By Stuart Gilmartin, a fund manager at SGAM
Last year was one of the worst the eurozone has suffered for a decade, with financial market buoyancy deteriorating as a result.
Along with concerns over accounting standards, companies have been forced to downgrade their earnings. In addition, the European Central Bank has been slower to cut interest rates than the US Federal Reserve.
There is now a growing belief that a further rate cut could give a boost to the sluggish pace of recovery in some of the larger European economies, particularly Germany, which remains a problem.
Only about 7% of the portfolio is currently invested in Germany, despite the fact it is the third largest economy in the world.
It is difficult to see when the misery will end. Germany has been downgraded in GDP terms since re-unification ' East Germany can be viewed as an expensive acquisition.
With 10 more countries about to join the EU, all with large deficits and cheap labour, investors need to ask themselves whether or not this will be another expensive acquisition.
Unsurprisingly in this tough environment, Europe's strongest sectors have been defensives, such as food and beverages, food producers and pharmaceuticals.
Outsourcing will continue as a theme but, in a world context, Europe clearly has demographic and pension problems and the Stability Pact needs to be ripped up.
It is hard to put together a case for European assets at the moment and the fund will have to concentrate on individual stocks in growth sectors.
However, we do believe the bottom has been reached in Europe, although how long it is likely to remain there is hard to predict. It is impossible to get away from the fact the US is the engine of world growth and the economic news from the US is getting better. Earnings forecasts are still too high for 2003 but we are seeing stabilisation in the market.
The general focus of the portfolio is currently towards mid-caps as that is where we feel the best opportunities in European markets lie.
In the short term, we feel it is wise to remain cautious, as full year 2002 results are likely to be uninspiring. However, we believe order books and trading statements will become more positive as economic growth picks up.
European markets are attractively valued and while we do not expect a rapid recovery, we do think we are at, or indeed through in some sectors, the trough in the earnings cycle.
We continue to look for stocks that offer growth at a reasonable price. In particular, we believe there is potential in the pharmaceutical and telecom sectors.
We are currently overweight cyclical services, a highly stock-specific sector but with some companies offering good visible growth coupled with attractive valuations. We also like resources. There is a consensus the oil price has to fall but could remain high in the short-term supported by the situations in Iraq and Venezuela, for example.
Basic industries is a sector that tends to do well in the first quarter of the year and a number of companies will benefit substantially from any economic pick-up.
Defensive sectors strong.
European markets have reached bottom.
Mid caps likely to outperform.
Eastern members could be a strain.
Buoyancy of markets has deteriorated.
Companies forced to downgrade earnings.
Moves to overweight equities and fixed income
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