By Gary Clarke, a fund manager at Rothschild Asset Management Calling market direction in the sh...
By Gary Clarke, a fund manager at Rothschild Asset Management
Calling market direction in the short term is a heroic and often futile exercise, best left to the market strategists.
I prefer to put my energy into picking large-cap stocks that I feel are undervalued and mid/small caps which have the right growth and value characteristics making it likely they will re-rate upward in the medium or long term.
The success of my fund this year has been based around the latter ' picking the right mid caps that have done tremendously well versus the large cap dominated index that has rightly continued to de-rate.
After a fall of around 25% in the key indices so far this year, I am left feeling there is some good value emerging in certain areas of the market.
The problem is that there is such a low level of confidence as to the strength of recovery of the global economy.
Confidence in growth has declined in recent months and this has been the key reason why markets have taken a further dive.
My approach is to look for the opportunities the market throws at you in such circumstances.
For example, VendexKBB, a Dutch retail group, is trading at six times earnings because there is so much pessimism about consumer spending in the Netherlands.
I don't need to believe in a strong and imminent recovery to believe in the shares. I get a 5% dividend and plenty of cashflow at a bargain price.
The company are buying back their own shares and re-building confidence in their strategy. This is exactly the type of stock idea I like.
I am also finding more technology-related ideas worth investing in. I'm not yet ready to overweight the mainstream names like Ericsson and Alcatel but I like Thomson Multimedia for its cashflow and I like Wavecom for its growth potential.
Wavecom make semiconductor modules which are a key component in mobile phones. Their biggest customers are in China and are currently ramping up volumes.
The market has not yet woken up to the potential growth this implies for Wavecom.
Another key for fund managers in this environment is being able to react quickly to the extraordinary volatility. I have been underweight Insurers all year and this has been a major contributor to performance.
On the morning of 24th July, financials in Europe were sold off heavily in sympathy with the US stocks that were wrapped up in the Enron scandal.
I took the opportunity to close some of our underweight by buying AXA at 9.2 euros.
The stock has subsequently risen by more than 40%. That is when you start thinking about taking some profit. The lesson is you must be flexible in your holding periods and be driven by valuations in all you do.
Fundamental value is emerging.
Economic fear throwing up some bargains.
Active managers can profit from volatility.
Pace of recovery called into question.
Some large cap stocks are still overvalued.
European markets still follow Wall Street.
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