There is still plenty of room for cost cutting and consolidation within corporate Europe and it form...
There is still plenty of room for cost cutting and consolidation within corporate Europe and it forms an investment theme with much further to run.
While Goldman Sachs is predicting real GDP growth of 2.1% for this year rising to 2.6% for 2000, there are still plenty of managers looking for cost-cutting plays in defensive stocks such as food retailing and pharmaceuticals.
Raj Shant, European fund manager at Credit Suisse Asset Management, says: "I would say that we are more in the bullish camp than the bearish camp on European growth. One of the big concerns going into 1999 was that lots of international investors were overweight in European equities and as a result they began to shift money out of Europe and into the Far East and Japan. This year we do not have that problem. We are looking at reasonable earnings growth and valuations in Europe and we believe European growth is going to go up next year."
Credit Suisse holds Carrefour, a French food retailing group, which has recently merged with food retailer Promodes.
Shant believes the stock is likely to benefit from cost cutting and Carrefour has seen its share price grow by 76.22% in the 12 months to 10 November.
Shant says: "The move gives the group a dominant position in the French market and makes it very difficult for companies like Wal-Mart to break into this market.
"It also leaves room for cost cutting as well as providing it with more market share in Spain and also in many Latin American countries."
Shant adds that Carrefour should be able to benefit from more favourable pricing terms with food manufacturers as it becomes a larger scale buyer of goods.
John Surplice, European fund manager at Perpetual, has been reducing holdings in the food retailing area. He prefers the pharmaceuticals sector which he sees as benefiting from the potential for consolidation and holds Novartis.
The stock makes up 2.5% of the FT/S&P Europe ex-UK index. Surplice points out that it is the sort of stock that many investors who were underweight are now looking to close down their bet and go neutral, in case it starts to perform better.
Novartis has seen its share price fall by 3.05% in Swiss franc terms in the 12 months to 10 November. He says: "The problem with food retailers is that if you believe in better growth in Europe then stocks such as food retailers are going to be left behind."
Credit Suisse also holds Dutch food retailing group Laurus which has around 27% of the Dutch market. Shant says that Laurus is one of the cheaper food retailing stocks around, based on the measure of enterprise value to sales.
Enterprise value to sales is calculated from the market cap of a firm plus its total debt divided by its total sales. Laurus is running at an enterprise value to sales level of 50%. Shant says that a typical enterprise value to sales rating for a blue chip food retailer is around 70% to 80%.
The investment house also holds German food retailing group Metro which, until the Carrefour deal with Promodes, was the largest food retailer in Europe.
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