Market  Outlook 2008 - Europe ex UK  - Richard Pease


European equity 2008 outlook by Richard Pease, Director of European equities

“The sharp falls in equity markets in Europe in late 2007 suggest that the sub-prime fallout caught most investors off guard. The initial response has been reactionary with financials taking a hammering and cyclical stocks dragged down in the melee. The falls have been indiscriminate with scant regard given to the trading histories or the management experience of companies. Most frustrating has been the fact that many industrial companies with large service or maintenance arms have strong recurrent earnings, yet they are being valued as if earnings were about to collapse.

“These low valuations might be justifiable if Europe was about to enter recession but I believe such an assessment is an overreaction. While the peripheral countries of Spain and Ireland are sensitive to a housing slowdown the core economies of Germany and France are still reporting decent growth and companies have strong order books. European companies dominate in exporting capital goods to emerging markets, countries for which the credit crunch in the west is an irritation but not reason enough to depart from their long-term goals of industrialising.

“Out of adversity comes opportunity and I believe 2008 will see a return to sanity as well-managed, cash generative companies trading at depressed levels enjoy a recovery in their share prices. While the polarisation of the market in late 2007 has rewarded a defensive stance with telecoms and utilities holding up, I believe that real profits can be made in 2008 from companies that have been unduly punished, namely selected industrials and financials. Positive earnings results in the new year could be just the catalyst that leads to their recovery.

While the European economy is likely to grow more slowly in 2008 than 2007 the European Central Bank, along with other central banks, has the scope to loosen monetary policy. The markets will expect a resolution to the credit crunch in 2008 but in the meantime cash-generative companies are likely to take advantage of the conditions to make earnings accretive bolt-ons. We are already beginning to see this through opportunistic takeovers such as Randstad, the Dutch recruitment company’s tilt at rival Vedior. Those investors who have biased their portfolios towards well-managed companies with experience of navigating challenging conditions should be well rewarded as sentiment improves through 2008.”

Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice. The value of investments and any income from them may fall as well as rise and may also increase or decrease as a result of changes in exchange rates between currencies. Investors may not get back the amount originally invested.