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 that 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 that companies with comparatively reliable earnings, such as food, beverage and tobacco stocks, have proved particularly popular. There is now not much value left in many of these areas, begging the question of where 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 that many companies will face competition from cheaper, generic versions of their key products.
It appears, however, that all pharmaceuticals companies have been tarred with the same brush, despite the fact that several of them, including Novartis, 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 therefore 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 at the euro's strength from a more positive aspect, inflationary pressures should be held back due to the effects of cheaper imports, thereby reducing pressure on the European Central Bank to raise interest rates in the near future.
Looking ahead, the current sluggish pace of economic growth makes the recovery that has been predicted for the second half of this year appear increasingly unlikely.
Valuations fallen to more realistic levels.
Little pressure on ECB to increase rates.
Euro strength holding back inflation.
Consumer confidence slumped in Germany.
Sluggish pace of economic growth.
Little value left indefensives.
Moves to overweight equities and fixed income
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