According to the latest analysis of European fund portfolio, carried out by Forsyth Partners, manage...
According to the latest analysis of European fund portfolio, carried out by Forsyth Partners, managers of European portfolios are still finding plenty of opportunities. But they are wary of the prospects for certain sectors, in particular telecoms and technology stocks.
In terms of investment outlook, managers see clear evidence of an economic slowdown and many believe that volume growth has peaked for this cycle. Much of this slowdown has been discounted in current valuations however. The consensus view is that the Euro will remain under pressure as excess capital generated by restructuring is employed produtively, often outside the euro-zone.
Although managers are showing concern about the TMT sector, average weightings to technology are still high conpared to the benchmark weight-ing of 8%, reinforcing the conviction about the sector as a whole. Peter Toogood, who heads up the Forsyth research product Fund Analysis & Ratings, comments: The desire to focus upon TMT related issues requires an even greater emphasis upon stock selection to identify the winners and losers. The winners will have proprietary technology, strong brand names and a clear growth path. The problem for many of these companies is that they are often operating in new businesses sectors, which are relatively immature. The stock selection process must therefore cope with two decisions. Firstly, the viability of the sector overall and then the identification of the winning companies within that sector. For this reason, dot.coms have generally been avoided, as they rarely displayed a sustainable business model.
The concern about valuations on some these stocks is put down to a failure on the part of investors to understand the harshness of the economic environment and the impact this is having on industrial stocks and cyclicals generally. The prudent fund managers will demand further clarification on the state of the economy both in the UK and US before progressing further.
Among fund managers focus-ing on the UK, the consensus view is that many industries are coming under pressure from secular and cyclical influences. The secular pressures include price transparency generated by the internet and the availability of capital to enter the areas of supernormal profitability to eventually erode margins. Tele-communications is a classic example of an industry under pressure from oversupply in the medium term. Cyclical pressures relate to higher wage costs, stronger commodity prices and a relatively unsupportive monetary environment. Managers are saying that the premium applied to companies capable of delivering sustainable excess returns will rise and that they must focus attention on those stocks and sectors which can grow in such an environment. Current favourites include a combination of defensive and growth stocks such as pharmaceuticals, advertising and technology at the expense of industrials, financials and retailers.
A soft landing in the US is the minimum that is required to avoid a significant sell-off. This slowdown now looks the most likely scenario and the major macroeconomic risk to the market has declined in significance. As a result, investors in Europe have focused upon market dynamics and appear to be unimpressed by what they see.
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