Writing in mid-October about the prospects for European equities is something of a hospital pass. Bu...
Writing in mid-October about the prospects for European equities is something of a hospital pass.
But this month's collapse in stock prices, not just in technology but across the board, has, if anything, merely served to underline our view about the likely future direction of European equity markets and confirmed the relevance of our stock disciplines.
Our central case of a US soft landing remains in place. All the evidence is of slowing growth but recessionary fears are overblown, despite the spike in the oil price. Simultaneously, we remain optimistic on the prospects for inflation. Raw material price increases are simply not getting passed on to the consumer in an intensely competitive corporate environment. Indeed, a bigger concern for us would be if the ECB continues to raise interest rates in the face of a non-existent inflationary menace. Finally, we have seen nothing to make us alter substantially our earnings growth forecasts for European companies.
Given that concerns over a hard landing for the economy have subsided, we believe risk aversion will give way to risk appetite over the next quarter.
However, it remains unclear as to what the immediate trigger will be. This means that we are adopting a wait and see approach. What we certainly do not want to risk is being overly bearish at a time when markets have already troughed. In particular, we shall be watching developments in the high yield bond markets with interest. Already there are signs that the supply problems resulting from the flood of telcos raising finance to fund the rollout of 3G networks may be being priced into yields. This could be the beginning of an important shift in sentiment.
What does this mean in terms of stock selection? We continue to look for companies with strong top line growth, good market positions, a technological edge and, above all, pricing power. We are still believers in growth stories but increasingly these are what we call consumer-related growth stocks rather than pure technology plays.
We remain overweight in oil stocks, with a particular preference for Total Fina. The oil price is likely to remain stronger for longer and this has still not been factored into earnings estimates for next year.
Total has exposure to some of the most exciting deepwater oil discoveries, whilst the restructuring story still has legs. We also remain sanguine about the media sector.
In continental Europe there is a solid long-term secular growth story in terms of advertising and the companies we invest in tend to dominate their respective markets, giving them that all-important pricing power. In terms of technology we are broadly neutral. Here stock selection is vital.
William Davies is head of European Equities at Scudder Threadneedle Investments
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