Interest rate uncertainty clouds eurozone horizon

Selective stockpicking in the European markets has been the only way to achieve positive returns over the year to 8 August, as there has been wide diversity among the top performers.

The top performing European sector for the year to 13 August has been machinery, up 30% in euro terms, compared with an overall fall of 9.72% in the Bloomberg European 500 index. Other top performing sectors include tobacco, up 10.31%; autos, up 8.99%; metal and mining, with a rise of 5.07%; and building materials, having risen 4.48%.

This compares with the more homogeneous bottom five performers: media, which is down 28.53% for the year to 8 August; manufacturing, down 31.40%; telecom services, returning -37.59%; and computer services and telecom equipment, down 49.27% and 58.88% respectively.

Looking past the most successful sectors, the top five stocks show even more divergence, underlying the stock specific nature of the market in today's climate. The top stock in the Bloomberg European 500 is UK-listed Signet, a retailer specialising in jewellery and watches, having risen by 52.74% in the year to 8 August. It is followed by two other UK-listed stocks, financials stock the Man Group and manufacturing and distribution company Rexam.

Rounding out the top five are Spanish firm Grupo Ferrovial, a construction stock, and Swedish Match, as its name indicates, a Swedish match making firm.

Alex Darwall, fund manager of Jupiter European, pays little attention to the vagaries of the individual countries and says stock picking is the key to Europe. He says: 'I am more interested in finding a company that can achieve profits, irrespective of what is happening with the government.'

Since December, when he took over the management of the fund from Richard Pease who left for New Star, Darwall has sold some £450m in stock, much of it from the Neuer Markt and telecom companies such as Vodafone.

Preferring the mid-cap area of the market and noting that innovation is hard to find in the large-cap area still does not prevent Darwall from holding some blue chips. He cites L'Oréal as a large cap, innovative company.

According to Chris Tracey, global strategist at JPMorgan Fleming, European investors have continued to struggle under pressure from slowing economic data. He says: 'The ECB has again failed to provide support, keeping eurozone interest rates on hold at 4.5%, despite falling business and consumer confidence and rising unemployment across the region. German investors have been further depressed by stock overhang concerns for Deutsche Telekom and disappointing second quarter figures from Deutsche Bank.

'The short-term outlook for continental European equities remains clouded by interest rate uncertainty. We believe rates will fall by 50 basis points this year as inflationary pressures, which have already eased recently, continue to fall over the next few months as the economy cools.'

Against the backdrop of slowing economic growth, it is even more necessary to focus on durable and successful business models, that do not depend on any specific economic scenarios, says Darwall. 'We continue to focus on stock-specific opportunities, which is vital,' he says.

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