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Fund Managers’ Views

Lee Jones asks four fund managers to give their outlook for the Europe ex-UK sector

Focus is on quality teams that can manage the cycle

Vincent Devlin, continental European fund, Blackrock

In 2008, everyone was looking at the US as the epicenter of the economic problems but now the EU is the epicentre and we think that sorts the wheat from the chaff in terms of managing portfolios in this environment.

Being focused on what type of stocks you want is essential. There is a lot of uncertainly in Europe and a lot rests on announcements from policymakers and politicians. So the conditions steer us in a different direction – if growth is positive but lower, we need to focus on companies that are market share winners and will still get higher than average growth.

If you look at Kuehne and Nagel, a Swiss logistics company that owns fleets and warehouses, it is a company that is gradually taking market share year in and year out and, as an economy grows, a logistics firm will directly benefit from that.

We are focusing on quality executed management teams as they are more likely to be able to manage the cycle much better and are more likely to capitalise on upswings if and when they come about. This can be seen in Heineken, which has recently acquired Femsa, a Latin American brewery.

Heineken’s deal was a good one and is an example of emerging market growth, albeit a gradual growth which is natural in this environment.

The wait for corporates to start spending again

Jaime Ramos-Martin, European equity growth fund, Standard Life Investments

We believe global trade in 2010 will surprise on the upside. This view is confirmed by some of the data from the Chinese ports, the throughput in the container ports there have been at peak levels. We like asset-driven transport stock. We own the Danish firm Maersk, a firm driven by shipping, and it has been performing well for a while now. UPS is up too, driven by the international express business.

Many people have been concerned that the consumer is too levered and they are not spending enough. But in reality it has not been the consumer who is driving the crisis, rather it has been the corporates who have been unwilling or unable to spend. So for us, the key is to see when the corporates start spending again and we believe there is still some stock that is not priced for any corporate spend recovery at all. For example, we like companies ready to restaff if necessary, like the German store Decco. It slashed staff and costs and it has become very flexible as a result in the face of macro uncertainties.

European firms are not going to spend as much as they used to but we are looking for firms that if they are going to spend it has not yet been recognised. We are not interested in capital-rich companies who are priced for investment because there is the risk that expectations will not be filled. We prefer stocks that will outperform so, even if there is not much of a recovery, these stocks will not disappoint.

We try and isolate the firms as much as possible, so the macro problems do not affect us. The big macro problems do make things tougher as you need to keep a cool head because there will be more volatility but you need to hold firm and prove your worth as a manager.

Move away from sector-driven trading

Cedric de Fonclare, European special situations fund, Jupiter

There has been a dramatic change in investment conditions in the five years since we have been managing the fund. We have seen further global credit expansion, a property bubble, a resurgent China, a credit crunch, a banking crisis, a global slowdown, huge government stimulus, a record equity market bounce and most recently, a sovereign debt crisis in Europe.

European companies with international operations, strong balance sheets and structural growth will deliver the best opportunities for the region in the medium term.

At the same time, we believe one of the more significant consequences of the recent crisis will be greater political intervention. This will lead inevitably to higher taxation and more regulation. At present, therefore, we are wary of highly regulated sectors such as banks, utilities and telecoms where political decision-making could have a profound effect.

Instead, the portfolio is currently focused on European companies with international businesses, particularly those in core European countries such as Germany and Finland because there are benefits of a weak euro for exporters. Balance sheets have been strengthened, costs taken out and companies have not used macro events in Southern Europe as an excuse for earnings caution.

With this in mind, we like Fresenius Medical Care, a dialysis provider exposed to changing healthcare demographics and increasingly aging populations. We also like Syngenta, a producer of agrochemicals and seeds that allow farmers to produce higher crop yields that stands to benefit from global food scarcity and population growth.

While macro-economic concerns continue to dominate the headlines, markets are likely to remain volatile. However, we expect investors’ focus to shift over time towards the qualities of individual stocks capable of delivering growth in a challenging environment, and away from sector-driven trading.

World-class discoveries

Gary West, continental Europe fund, Liontrust

We think plenty of European managers start thinking about their portfolios from the top down and have been concerned about the macro problems. We are the opposite and while the portfolio does take knocks from what happens in the economy, on the whole, things have washed over us.

Europe does have some fairly major structural problems within the union but we have found some world-class firms operating in there regardless. Over the medium term, if we are concentrating on very good quality businesses exporting strongly to the rest of the world with a weaker euro, then we do not think that is too bad a place to be. Where we have been able to identify businesses like that they have tended to perform well in spite of the weaknesses and worries at the macro level. CargoTec, for example, is a Finnish lift company that manufactures lifts and forklifts and is heavily involved in port terminals. The management has coped well through the recession. The company took a lot of cost out and income is up 40 per cent this year. This is what we are looking for – very good value on normal earnings, well run and the ability to take costs out in the recession. Firms with these characteristics are now enjoying a strong recovery in their fortunes.

Things will remain tough but we are in the right place. European nations will rely on China to grow and, if that is the case, there are some quality companies in Europe who will sell into Asia and the rest of the world. So from an equity perspective, with a relatively weaker euro, it is an interesting environment – as long as you have a process that will identify the right type of company that will flourish over the coming years.

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