Growth in Europe should come through strongly this year and perhaps even more than expected. Estimat...
Growth in Europe should come through strongly this year and perhaps even more than expected. Estimates as to GDP growth have been revised upwards to a touch above 3%.
Cyclical plays like the steel companies claim they've never had it so good. Fundamentals too remain on track, as do other investment themes. Ageing populations will continue to shift into equities and the corporate restructuring story has barely begun (although proposed tax changes in Germany may cause the sale of non-core assets to be deferred as companies wait in order to raise better prices). The euro seems set to strengthen, and with pricing power in many sectors remaining weak to non-existent, we remain sanguine on the outlook for inflation.
So why the cause for butterflies? To say that monetary tightening is on its way is to state the obvious, nonetheless bonds are likely to be a disruptive influence on the market over the next quarter at least. Nowhere, of course, does this have bigger implications than in the technology and telecoms sectors.
Although we remain firmly convinced about the long-term story in these areas, we have nonetheless recently been concerned about excessive valuations in certain stocks. Whilst at times last year betting on technology was like shooting fish in a barrel, the next few months will certainly not see such easy wins. Selectivity has become the name of the game. And this certainly isn't a game for the faint-hearted. When companies as generally well regarded as Lucent come out with profits warnings, it can be hard to keep one's cool.
At Threadneedle, we are extremely disciplined in our likes and dislikes. E-tailers and dot.coms are by and large no-go areas, but consultants and IT infrastructure still offer value. Put in a Victorian context, we are short horses and prefer the guys laying the track to the train companies themselves.
In particular, mobile telecoms remain a key theme for us and we are accordingly overweight in both Nokia and Ericsson. This is a field with high barriers to entry and with revenues per subscriber set to rise strongly thanks to the impending growth in data traffic and the beginnings of m-commerce (internet access by mobile phone).
More importantly, mobile is one of the few technology-related areas in which Europe can boast of 'best of breed' companies. In the media sector, the pattern is more mixed. If nothing else, the AOL/Time Warner merger reinforces the view that content is all-important. But 'content' is far too broad a definition to offer much assistance when it comes to selecting stocks. Quite what sort of content is best? The ever-widening discrepancy in the valuations of publishing companies as diverse as Wolters Kluwer and Mediaset is illuminating, with the former beginning to appear almost as a quasi-defensive rather than a growth stock.
David Dudding is analyst at Scudder Threadneedle Investments
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined