By Alan Zlatar, manager of the Credit Suisse European Fund It has been a scary year for investor...
By Alan Zlatar, manager of the Credit Suisse European Fund
It has been a scary year for investors in continental European equities. Should we be buying now or is it still not too late to head for the nuclear bunker and await total meltdown?
Let us have a look at the opposing forces that might push markets up or down from here.
On the negative side, sentiment is terrible among fund managers and retail investors. A lot of people have called the market spectacularly wrong by buying technology Isas or investing their funds in Neuer Markt stocks and we are currently seeing the consequences of that.
On top of this increased reluctance to invest has come a wave of corporate scandals in the US from the likes of WorldCom, Tyco, Xerox and Enron. These have raised a new level of concern: not only do you have to satisfy yourself a company is operating in an attractive industry, you also have to assess the likelihood the published accounts are misleading.
It doesn't seem that long ago that a European company was hailed when it announced a move to US generally accepted acc-ounting practice reporting. Now it seems European international accounting standards may be the model for US reforms.
Some of the optimism strategists were spreading earlier in the year was based on the premise of an economic pick-up in the second half of this year. This looks to have been dashed in both the US and Europe. Money market expectations of interest rate rises have moved out into next year, indicating scepticism about recovery coming soon.
Forward-looking confidence surveys such as the German IFO have been weakening. The euro has risen against the dollar, which has a dampening effect on activity. We will have to wait a little longer for green shoots to emerge.
Haven't these falls made the market cheap, though? Well, cheaper maybe, but remember it is next year's profits that count, not last year's, and economic recovery is proving elusive.
There is some good news out there. Valuations that compare share prices to government bond yields show shares are currently very cheap. Critics of this yardstick claim it has no intellectual validity, but it has been a good indicator in the past.
The recovery may have been delayed but that does not mean it will not come. Low interest rates are powerful medicine and, while it can be hard to know how quickly they will take effect, the rate cuts from the fourth quarter of last year should be making themselves felt soon.
Management teams are not currently prepared to risk talking about an improvement in company prospects but once they start to feel things are getting better they will be prepared to make some more bullish comments.
Big market swings always present opportunities in individual stocks. Waves of indiscriminate selling can punish all companies equally when some are, in fact, more resilient than others.
The same applies in reverse when the market moves up sharply. These are perfect opportunities for active stock pickers with a clear understanding of the fair value of the companies they invest in.
Shares are currently very cheap
Big market swings present opportunities
Continuing low interest rates
Sentiment poor on European market
Economic recovery proving elusive
Confidence indicators weakening
Taking the time to look
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