European markets have been weak now for over two years, having lost a third of their value since the...
European markets have been weak now for over two years, having lost a third of their value since the March 2000 peak.
Senior portfolio manager at Dresdner RCM Global Investors, Juliet Cohn, says the magnitude of the fall we have now seen is as great as that in the previous corrections, namely those of 1973/4, 1987 and 1990.
'The principle difference however is that the correction has occurred over a much longer time period,' she says. 'It is also worth considering the massive polarisation between different sectors. The IT hardware sector has lost 80% of its March 2000 value, while software has lost 78%, and telecoms 76%. Meanwhile more defensive sectors such as tobacco have risen 149%, while we have seen a 49% rise from the beverage sector and 34% from the food producers. It is becoming increasingly popular to suggest we should try to refocus our attention on some of the sectors that have seen the greatest correction, but ultimately this could well prove dangerous.'
She adds that it is tempting to see companies in the tech, media and telecoms sector in particular as oversold. 'Undoubtedly some of them are, but it is worth bearing in mind that we will undoubtedly overshoot on the downside, just as we did on the upside,' she says.
'More importantly, we need to convince ourselves that these companies have a valid investment case. Investors are naturally attracted to high growth sectors but it is precisely these areas that are facing the most intense competition, and we need to be mindful that it will be increasingly difficult for the participants to make money.'
Cohn said the attractions of many of the defensive sectors are obvious, but the number of earnings upgrades and the scope for earnings surprises has increased. The Spanish retailer Inditex, operator of the Zara clothing chain, is a good example of this ' and positive newsflow surrounding the company is gathering momentum. Low-budget airline Ryanair also recently announced results that exceeded expectations.
Among other defensives, oil companies have been undergoing major restructuring in Europe.
Richard Wiseman, head of continental European equities at Clerical Medical International, said the current oil price of $25 is at a healthy level for Europe. 'There has been quite a lot of corporate investment in the oil sector because the backdrop is healthy,' he says
'Opec has been behaving itself and I do not forecast any change going forward.'
Within the sector, he feels BP and Italian-based ENI have a good future. Investors regard them as less volatile investments than they use to be, he says, and these companies are expected to grow.
However, he feels Royal Dutch Oil has slipped somewhat in spite of being a steady grower. 'There is not much upside and the share price has been discounted too much,' he says.
Robert Chardon, equity analyst at Lombard Odier, said his position on the oil industry has been quite cautious since the end of last year because of an expected recovery in the stock market. 'Energy stocks are defensive in nature and my thinking was that if the stock market started to recover, oil companies would underperform,' he says.
Upside surprises among defensives.
Oil stocks less volatile than in past.
Current oil price healthy for Europe.
Political tensions in Middle East.
Drop in oil price could squeeze margins.
Ongoing weakness of European markets.
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