BlackRock's Albert Morrillo tries to identify stock-specific anomalies
Challenges remain in the European markets and the growth seen in the late 1990s is unlikely to be seen again, according to Albert Morrillo, manager of Investec's European fund.
Speaking at a recent International Investment conference, Morrillo said opportunities remain at the stockpicking level and in trying to identify companies that will continue to show signs of robust earnings growth.
Corporations did well out of globalisation and so did equity markets and investors, Morrillo pointed out.
'We all did well and thought we were geniuses,' he said. 'Investing in equities was risk free and it was going to compound at 15% per year. Remember that script? That is what we are trying to digest now.'
Some aspects of the European bull were specific to Europe, such as deregulation and privatisation, he noted. Then there was monetary union and the convergence trade that surrounded the euro.
It was not difficult to suggest Europe had a chance of being the market of the first decade of the millennium just like Japan had been in the 1980s and just like the US had been in the 1990s, Morrillo said.
Still, he added, it does not matter what you look at, the US is a better place to do business, as Europe is more rigid and less business friendly.
'The point to make is that Europe is at a competitive disadvantage, but the disadvantage is less than it was five years ago,' Morrillo said.
'Markets capture change and direction, not absolutes. Are there any areas in which we are competitive?
'Yes, there are areas in which we have a bigger chunk of the export markets but the problem is they are in the old economy, if that is a problem.
'And if you are one of those who think equities can only go up when technology leads: one, you live in a time warp; two, you are wrong; three, you are probably looking at other places than Europe at the best of times.'
Morrillo conceded there are challenges in the European market but few that have not existed for the past 10 years.
Investor sentiment has swung from absurdly high to absurdly low and, like everything else, the truth has to be somewhere in between, he said.
'That's why we're still in the mess we're in; the excess hasn't quite washed through,' he argued.
While Morrillo sees scope for a small bounce next year, he believes the figures of the late 1990s are unlikely to be seen again. 'It's as if nobody has figured it out that that was a once in a lifetime point in earnings,' he said.
'The European insurance market by and large needs recapitalising. And I won't even start with the France Telecoms and Deutsche Telekoms of this world. You will get some big numbers in recapitalisation, and that is the problem. Any sort of rally will be met by big issuance.
'There was only one way to go: exploit specific anomalies in the market because there are some that are becoming evident. The bear market is maturing but the risks remain and, if you want to get worried, the scenario is: real estate collapses, the dollar collapses, the US consumer stops consuming and then we've got 25% off markets, even from what we've got today.'
The drivers of sustained recovery are not apparent, Morrillo, argued. He suggested looking for capex, a sign that companies are rebuilding.
There is a convergence of valuation between sectors, with NÃ©stlÃ© and Nokia on similar multiples, according to Morrillo 'One of them is wrong; take your pick,' he said.
Volatility levels have also been redefined and, since July, the market has swung wildly. 'It is driving everybody nuts,' said Morrillo. 'You look at the screen and think you've got a direction, and it lasts half an hour.'
Some markets clearly became oversold in July and again some markets have been oversold on insurance solvency issue fears that are real, Morrillo said. 'Zurich is not raising capital because they have not got a problem,' he noted. 'Few companies are recapitalising out of a position of strength apart from Legal & General. The rest are recapitalising out of a position of distress. So focus on financial stability, focus on what little pricing power there is and focus on autonomous growth.'
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