In common with other world markets, Europe has experienced high volatility in the last few months as...
In common with other world markets, Europe has experienced high volatility in the last few months as the telecommunications, media and technology sectors have lost some of their previous gains. Most investors expect volatility to continue for a while as the rotation between old and new economy stocks continues. We feel that even now, higher volatility is endemic in the markets as valuations remain at historic highs, and it has been valuations rather than real events that have been driving the markets recently.
The economic fundamentals in Europe remain positive with growth continuing to improve and inflation still at historically low levels. While interest rates will continue to rise, it is felt that the European Central Bank (ECB) will not make the mistake of hiking rates to an extent that would compromise the European recovery. The euro continues to be far weaker than expected and looks to have fallen further than is justified by fundamental economics. However, it remains vulnerable due to a combination of US economic strength and poor market sentiment. While the currency could fall further and undermine European returns for UK investors in the short term, we believe that a medium term recovery is justified.
In terms of our exposure to the European markets, we retain our long-term growth bias but are discriminating more markedly between the areas in which we are prepared to invest. As far as individual companies are concerned, we are paying particular attention to their business model and strategy to assess the likely long-term winners. Individual stock selection remains key as relative performance within sectors is likely to diverge as these winners significantly outperform.
We feel mobile internet access will continue to be a major growth area, and while Nokia and Ericsson will be beneficiaries, Vivendi is both well positioned through its joint venture with Vodafone and more attractively valued.
Content will also be a key value driver in the new economy and companies such as VNU (due to its broad exposure to media) and Canal Plus are of interest. In terms of security over the internet, both Ubizen and Biodata are well positioned. We do not, however, find the business model of the new European Internet Service Providers (ISP's) as attractive.
From a sectoral point of view, chemical companies should be helped by the strong world economy. The building materials sector is benefiting from global construction spend and Lafarge and St Gobain are well positioned to benefit from this.
We are concerned about the potential negative impact on the banking sector caused by the increase in competition coming from new entrants, made worse by the banks themselves increasingly entering each other's markets.
Jeff Currington is investment director, Norwich Union Investment Management
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