By Leon Howard Spinks, manager of the Jupiter European opportunities fund European markets ended...
By Leon Howard Spinks, manager of the Jupiter European opportunities fund
European markets ended 2001 with the strongest quarterly performance since the height of the stock market bubble.
As then, the rally was led by a narrow group of technology-related stocks. Its severity was all the more surprising given the backdrop of deteriorating underlying business conditions against which it occurred.
That large stocks led the market up is understandable as investors, while increasing their risk profile, first looked for the comfort of liquidity and familiarity. What is more surprising is that the areas of the economy with the greatest problems of overcapacity and weak demand, technology and telecoms, were at the forefront.
Emotion and liquidity, rather than fundamentals, drove the market higher. High beta stocks were sought out by investors eager not to be left behind as the market rose.
Many stocks in the technology, media and telecoms arena are high beta, at least partly because of their participation in the bubble of 1999-2000. Buying them based on their historical beta is to validate their performance over that period and to deny the valuations were previously inflated.
This anticipation of a repeat performance by the technology sector smacks of desperation, even if a number of stocks appeared oversold in the immediate aftermath of 11 September.
The job of an active fund manager should be to find profitable investment opportunities, to seek out companies trading below their fair values, where reasons are in place for the undervaluation to be corrected.
Active fund management is about finding opportunities in all areas of the market and is best done by focusing on tangible factors. Fear and greed are certainly powerful forces that can dramatically move markets but they ultimately lead to short-term overreactions. This throws up opportunities for those who recognise that investing is, in the end, about fundamentals.
For this reason, in a time when most honest economists or investors admit the global economy could go either way, investors may wish to focus on individual stocks.
Closet index tracking and speculation on short-term market movements are not the route to outperformance, especially in a volatile bear market.
The past decade has seen a huge proliferation of listed companies in Europe. IPOs and spin-offs have created a stockpicker's dream environment of winners and losers in a wide range of industries and companies at different stages of their life cycles.
No longer is Western Europe a call on top-down factors leading to country weightings and industry allocations based on macroeconomic variables.
Arguably, this is still the route to successful investing in emerging Europe, with its capital markets still at an early stage of development. With a limited quoted sector and a small choice of stocks, investors in the region are forced to focus on less tangible and predictable top-down factors.
While having a top-down view is clearly important, the diversity in Europe offers the luxury of focusing on the company and whether its ability to generate cash in the future is being correctly priced by the market.
Plenty of individual opportunities.
Secular growth themes in a number of areas.
A lot of bad news behind us.
Valuations currently high.
Best of the liquidity boost has past.
Earnings stil under pressure.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation