Fund of fund managers are preferring the UK to Europe because of the former's continued defensive ch...
Fund of fund managers are preferring the UK to Europe because of the former's continued defensive characteristics in an uncertain economic environment.
Richard Philbin, fund of funds manager at Isis Asset Management, says that the UK is further along in terms of economic recovery than Europe and is much less reliant on higher growth industries.
He adds: 'If you think the economy is going to race away this year then Europe should be where to invest, while the UK is a much better defensive bet.'
With global companies such as BP and GlaxoSmithKline in the UK index, Philbin believes that investing in the UK is also a good way of getting some decent global exposure. Although interest rates in Europe look set to fall in 2003, Philbin says Europe needs to sort out its policies before it can move forward.
As opposed to the UK, where the fiscal and monetary polices are sound, he says there are many questions over how the recovery will work in Europe, such as whether it will be triggered by low interest rates or a re-emergence of inflation.
Robert Burdett, fund of funds manager at Credit Suisse Asset Management (CSAM), is underweight both UK and European equities. He says economic momentum on the continent remains weak and the relative strength of the euro may hurt exporters and their corporate earnings. In the UK he says there has been data showing the housing market cooling, which may well impact consumer spending, as the increase in corporate spending roughly relates to the increasing in mortgages through refinacing in the recent house price boom. He says: 'Right now the US appears oversold and is due a bounce and the catalyst for this has been provided by President Bush's changes in tax dividends.'
Bambos Hambi, director of portfolio services at Rothschild Asset Management, says at present he is marginally overweight in the UK and marginally underweight in Europe. In the UK, Rothschilds still sees growth as relatively robust and the market as more defensive in nature.
He says: 'During this period of uncertainty, we see nothing to change performance over the last two years relative to other markets. However we are aware that if this uncertainty is removed the attraction of the UK may recede.'
For example, he says that if a war in Iraq is over quickly and oil prices fall to below $25 a barrel, and there are signs of economic growth in the US, he may look to reduce his UK weighting.
Hambi adds: 'In the UK we are worried that the increase in national contributions may hit net incomes. We are also worried about a cooling of the housing and employment markets. However if this does happen, we could see another 0.5% interest rate cut.'
In Europe, Hambi does not see economic prospects as being positive as he feels the strength of the euro will reduce the competitiveness of manufacturing exporters. Added to this, he says the Stability and Growth pact, which limits EU member countries' fiscal deficits to 3% of GDP, will enforce tighter budgets just when economies appear vulnerable. Hambi adds: 'We see some earnings growth but nothing spectacular. We do see interest rate cuts by the ECB as inflation is not as strong as they were fearing and there is the need to further stimulate economies across Europe.'
UK offers good defensive attributes.
US appears oversold and is due a bounce.
Further ECB rate cuts likely.
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