By Bill Blair, a fund manager at Swip The heavy losses suffered by European stock markets in rec...
By Bill Blair, a fund manager at Swip
The heavy losses suffered by European stock markets in recent weeks followed a period in which there was something of a mismatch between investor optimism and increasingly depressing economic news.
Retail sales and consumer confidence have slumped in Germany, France and Italy, putting the consumer-led economic rebound in jeopardy. The likelihood of a slower than anticipated economic recovery has increasingly unnerved investors.
The realisation that a delayed economic rebound will severely impact any recovery in corporate earnings had a particularly negative effect on investor sentiment. It is not surprising that within this environment, technology and telecoms stocks have remained the weakest areas of the market.
Announcements such as Nokia's recent statement that it is scaling back growth forecasts cemented investors' expectations technology and telecoms stocks have further to fall. If full-year earnings forecasts are to be met, many companies in these sectors are currently relying on a significant recovery in earnings during the final months of this year.
This appears increasingly unlikely and, as this has become apparent, expectations and valuations have fallen towards more realistic levels.
Given recent uncertainty and heavy stock market losses, it is also unsurprising companies with comparatively reliable earnings, such as food, beverage and tobacco stocks, have proved popular. There is not much value left in many of these areas, begging the question, where should investors should look for comparatively safe investments that still possess potential upside?
The pharmaceutical sector, traditionally another reliable defensive play, has suffered from sharp falls on concerns many companies will face competition from cheaper, generic versions of their key products. It appears, however, that all pharmaceutical companies have been tarred with the same brush, despite the fact several of them are not faced with such concerns.
The financial sector has also suffered from a significant sell-off, largely because of concerns about exposure to credit risk and Latin America's problems and worries about solvency levels among insurance companies.
There are, however, some areas of the market that offer value, although conditions are likely to remain difficult until firm evidence of economic recovery emerges. Unfortunately, the prospects of an imminent economic upturn have been hit by the euro's recent strength against the dollar, which threatens to make life increasingly difficult for exporters.
Looking ahead, the current sluggish pace of economic growth makes the recovery predicted for the second half of this year appear increasingly unlikely. As a result, corporate earnings may also take longer to recover and many profit forecasts still appear overly optimistic.
While further corporate earnings downgrades are likely, making it increasingly important to focus on companies with strong cashflow and balance sheet positions, the recent stock market sell-off has brought valuations on European bourses back to more realistic levels, particularly in comparison to the US market.
Defensives proving particularly popular.
Inflationary pressures should be held back.
Valuations looking more reasonable.
Corporate earnings downgrades likely.
Pharmas tarred with same negative brush.
Sell off in financial sector .
$17trn of debt is now ‘paying’ a negative yield
47 million Brits without financial advice
Faces substantial prison term
General election on 12 December