Opinion is divided on whether technology, media and insurance, the three worst performing sectors in...
Opinion is divided on whether technology, media and insurance, the three worst performing sectors in Europe last year, are now providing attractive opportunities for fund managers.
Over the calendar year 2002, media stocks returned -47.12%, insurance fell 46.84% and technology dropped 45.99% in a blanket sell-off, providing buying opportunities on a stock specific basis.
Raj Shant, head of European equities at Newton Investment Management, has been selectively buying into the technology and insurance sectors, noting technology stocks have now fallen by some 80% from peak to trough, with telecoms and insurance stocks not far behind. Shant has now taken his Newton Continental European fund overweight technology with an emphasis on market leading blue chips.
'We are focusing on the strongest and best run companies within each part of the sector. Increasingly, as times get difficult, the second tier players and companies with weaker balance sheets and market positions find themselves in a worsening position, while the leaders are in a better position to take market share,' Shant says. 'Whenever a market leader comes out with a strong statement it still lifts the sector, but it is ironic that it is treated as a single sector when in fact the market should be differentiating between the stronger and weaker companies.'
Mark Peden, head of European equities at Aegon Asset Management, is more cautious on technology and maintaining a neutral to underweight position in the sector.
Peden says: 'Technology share prices have fallen in line with earnings, so while the prices have gone down, the stocks have not necessarily been derated. We are not looking to go gung-ho into technology and believe stock selection is critical within the sector.'
Like Shant, Peden is favouring established blue chips with strong balance sheets in high margin business areas, such as Nokia and SAP.
Both Shant and Peden remain heavily underweight media on the basis that valuations in the sector remain unattractive, despite last year's price contractions.
Peden adds he remains unconvinced there will be a strong recovery in the advertising cycle in the near term, while broadcasters remain expensive.
Shant has taken the fund overweight insurance stocks in the past couple of months, however, albeit through a targeted strategy of buying into companies shoring up their balance sheets.
'In insurance, the key has been to focus on those stocks marked down, primarily because of balance sheet problems, that have divestments or rights issues,' Shant says. 'We have been buying into companies that are otherwise sound after their rights issues because the market is often quite slow to remove the discount for insolvency fears.'
Peden prefers banking stocks within the financials universe. He says insurance stocks are a proxy on the market and those groups which have not had rights issues or divested from loss making businesses, such as Axa and ING, may find any negative market movements force them into raising more cash.
He also favours groups that have addressed balance sheet concerns, such as Zurich Financial, but remains cautious of the sector overall.
Blue chip technology stocks undervalued.
Balance sheet repair across insurance sector.
Capex likely to improve over 2003.
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