Europe permeates everything these days. Editing the client newsletter for JM Finn & Co, the economic article centred on the goings-on in the eurozone. And Europe featured strongly at the Cofunds Winter Investment Conference I chaired last week. Remarkably, it was more upbeat than I expected, given the continuing turmoil in European bond markets.
The fund manager line-up was impressive. Richard Buxton from Schroders, Thames River’s Gary Potter, head of emerging markets debt at Aberdeen Asset Management Brett Diment – and that is just half of those who shared the platform – not to mention Jeff Randall from Sky News. And the overall message was that the odds remain in favour of Europe somehow muddling through.
Given that the following day the Spanish bond auction demonstrated just how fragile confidence is among investors, this might seem a brave, even foolhardy stance to take. But some of the points made by the speakers helped clarify what has become an opaque issue: how the member states of the single European currency can extract themselves from their current problems.
Success is not a given. Imposing austerity on populations angry with their political leaders for getting them into this mess was never going to be an easy task and could still result in social unrest, which, if sufficiently widespread, could derail the rescue plans.
What does seem certain is that Europe will look very different in a few years from now. How the UK will fit in is hard to envisage.
Not much to encourage investors emerged from domestic sources last week. Unemployment figures painted a bleak picture and Mervyn King made the expected downgrade of his expectations for our economic performance. But it is still what happens in Europe that dominates the arguments over whether or not we can avoid a double-dip. As the debate continues, so the nervousness will continue.
But some encouraging thoughts were expressed at the conference. Richard Buxton and Gary Potter made much of the fact that shares have progressed little in 14 years and that history suggests a breakout on the upside is possible before too long.
That breakout might take place from a level significantly lower than this, given current uncertainties, but there seems a good chance shares will be higher than current levels in a few years.
Neptune’s Douglas McDowell made a strong case for emerging markets continuing their rise against the developed world, while Andrew Wilmont from Axa reminded us that not all bonds are expensive. And learning from Cazenove’s Paul Marriage that 60 per cent of sales from UK smaller companies are overseas reminded us what a trading nation we still are.
We are not invulnerable to a global recession but we are in better shape than we sometimes care to admit.
Markets such as this favour active managers and are likely to do so until a rush of euphoria carries us into the final stages of the next bull run. There was also an undercurrent of enthusiasm for value stocks, with a couple of the managers telling us how important a component dividend income is in delivering equity returns.
Fund managers generally talk their book and seldom encourage investors to sell. But with our own FTSE 100 index still significantly below the high reached at the end of 1999 and equity valuation criteria standing at about a third of peak levels, according to one of the managers, the bulls have a point – what investors need is patience.
Brian Tora is an associate with investment managers JM Finn & Co