Early March saw continental European equity markets fall to record lows as weak corporate data coinc...
Early March saw continental European equity markets fall to record lows as weak corporate data coincided with renewed fears of a war in Iraq. France's CAC 40 index sank below the 2,600 mark, its lowest level for five years.
A massive corporate loss reported by Vivendi on 6 March helped to undermine the market. In Frankfurt, meanwhile, shares sunk to seven-year lows, with the DAX falling to 2,411.
This was due in part to a statement from the Bundesbank warning that Germany could be facing a protracted period of weakness.
After an initial burst of enthusiasm to herald the New Year, continental European markets have clearly reverted back to reflecting on economic frailties such as the deteriorating labour market.
As firms shift their focus away from slashing spending on equipment and inventories and towards labour adjustments, unemployment has been rising.
In Germany, January unemployment surged by 62,000, triple the average monthly increase in 2002.
Our stock and sector preferences reflect the uncertainty of the volatile environment. We are positioned in companies that will deliver earnings growth through turbulent times, especially those in the more defensive areas of the market.
We particularly favour food, beverages and tobacco, healthcare and telecommunications. In the food, beverages and tobacco sectors, we see opportunities in companies with long-term growth prospects that are attractively valued. In healthcare, valuations are as low as in 1993/94, the last period of acute weakness in this sector.
Demographic trends, in particular an ageing population, mean there is likely to continue to be strong demand for healthcare products and many companies in the sector continue to generate substantial cashflow from their existing product range.
In the telecommunications sector, we continue to favour mobile phone companies, both on the basis of market growth and their pricing power. We remain cautious on lower quality, higher-beta stocks because of their unclear outlook and weak fundamentals.
Overall, we believe that equities will outperform bonds and cash over the course of the year, but not substantially. We view any equity rally following conflict in the Gulf as likely to be short-lived since geopolitical uncertainty is only a minor contributing factor to recent stock market declines.
In this difficult operating environment misplaced optimism will be severely punished, so we continue to shun those businesses whose current business performance is most challenged, viewing valuations across many such companies as either optimistic or too speculative.
As such, we will continue to exercise our preference for those businesses in continental Europe that have high returns, good cash generation and the ability to grow and deliver on promised numbers against a volatile backdrop.
Such businesses, we believe, are now available at attractive valuations, both in absolute terms and in relative terms compared to their own traded histories.
Economic indicators suggest a recovery.
Opportunities for firms with earnings growth.
Further monetary easing looks likely.
Staying invested could prove lucrative
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Less environment, more governance threatens to undermine firms' green credentials
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