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European champion

Trying to forecast what each individual region might return over the next year, or years into the future, seems largely futile to me. There are so many variables which are impossible to predict.

Generally, I prefer to concentrate on finding quality fund managers. This week, I look at a currently unpopular sector, Europe, through the eyes of Chris Rice of Cazenove – one of the best.

Mr Rice has been running this fund for six years and has 16 years investment experience. In my opinion, he is easily one of the top European fund managers and should be seriously considered by those seeking an investment in the region.

Right now, perhaps you are thinking I am completely mad. Who would want to buy shares now? Isn’t the world coming to an end? Well, when markets establish a clear trend, people can never imagine that trend reversing.

During a bull market, people seem to believe it will rise forever and when we are in a bear market, people reject the possibility that it will ever rise again. Experience tells us that both viewpoints are wrong.

Chris Rice’s style is to run a diversified portfolio of shares in large and medium-sized companies. He looks carefully at the business cycle and tries to match his stock picks to where we are in the economic cycle.

This is not an easy thing to do and when I caught up with him last week, he said he saw three different cycles at the moment – economic, corporate and valuation.

The valuation cycle brings some positive news. The start of 2009 saw the market valuation at around the third-lowest it has been in its history, with share prices at around 7.5 times earnings on average.

From that point of view, the market appears cheap. However, we are not quite out of the woods yet. Mr Rice believes any recovery in the short term could be sharp but we are not yet at the stage of a sustainable rally.

It seems we still have some way to go before we reach the bottom of the corporate earnings’ cycle. Perhaps we are halfway through the traditional peak-to-trough fall in earnings but most of the fall so far has come from the financial sector. Other parts of the economy have not suffered to the same degree so this is something to keep an eye on in future.

Turning to the economic cycle, governments are doing everything (and anything) they can to try and halt this economic decline. Their somewhat confused approach is causing bafflement among investors and is doing nothing to help confidence in the market.

Mr Rice’s view is to be overweight in large, well-capitalised defensive companies with little or no debt. He particularly does not want to invest in companies that were exposed to the huge boom in emerging markets, as their earnings of the last few years clearly cannot be repeated in the short term.

His portfolio is fully of pharmaceuticals, telecoms and food stocks. The key decision to make is what will happen in the financial sector. Until it stabilises (whether through recovery or total nationalisation), it is hard to see how the markets can make any headway.

Given all this bad news, I did ask Mr Rice whether it was worth even investing in Europe. He admits that the next six months are extremely foggy but he remains a believer in the long-term potential of the stockmarket.

That is a view I share and top-class managers like Chris Rice are the people to see investors through.

As I have said before, it may be wise to drip money into the markets gradually and to remain committed to a time horizon of at least five years – 10 would be even better.

Mark Dampier is head of research at Hargreaves Lansdown


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