View more on these topics

Steady as she grows

Market sentiment in Europe has swung from depression to a much more relaxed or even enthusiastic view over the last 12 to 18 months.

But while it seems likely that the economic news will continue to improve, we cannot assume this means a return to rapid growth. The environment remains extremely difficult, with external influences likely to pose the biggest threat. My working assumption for the next few years is that we will see a prolonged period of low growth throughout Europe.

Low growth is not necessarily a negative. Continental European markets are just too mature and constrained to be able to show the kind of growth which was seen for much of the 1980s and 1990s.

It does mean that a tempering of current enthusiasm might be prudent. As gloomy sentiment at the beginning of 2003 proved to be excessive, I believe the reverse is true now.

At a stock level, the biggest threat to European markets comes from the US. There has been much talk of the effects of the weakening dollar on European companies. Many of them have a significant US exposure, either because they are multinational and have earnings in dollars or because they export to the US and derive a portion of their earnings from there.

The dollar has weakened considerably but I think it will go further. The risks will become of greater concern if any further slide happens more quickly than expected. Markets will take a gradual decline in their stride, even to 1.4. But if that slide happens more suddenly, I think markets might feel more nervous. This is an issue we need to keep a close eye on but not one to get too anxious about for the time being.

In this new low-growth era, we need to look more closely at the valuations of the companies identified. In the aftermath of the last technology bubble (and arguably in the midst of the next) it has undoubtedly become more difficult to identify true growth companies and then assess how the market will choose to evaluate them.

We have taken a more pragmatic view. There are plenty of good-value growth companies in Europe but there are a number of factors to consider if you want to separate them from the more expensive growth companies, which may still be worth holding but for different reasons.

Generally, patience and faith in the intrinsic value of a company should be rewarded.

I believe the steady growth stories, some of which are categorised as defensive, will win out in this environment. These have tended to underperform in the recent rally, which has been led for much of the time by disaster recovery situations, so valuations have come down, providing some good long-term potential.

Many European companies have undertaken some dramatic cost-cutting exercises in recent years. Coupled with an improvement in the top-line growth as demand recovers, this is a strong combination.

Other themes that should be interesting and provide good long-term potential include the growth in savings and the shift in consumption styles. Aegon and Skandia remain examples of companies that should reap the rewards from the increased need for long-term savings. These areas, along with more well-used growth themes such as outsourcing, restructuring and selected technology plays, should be where growth is found in the next few years.

In the last few months, we have seen more companies coming to the market with placings and rights issues. This broad-based capital raising may offer further opportunities but I will be very selective about these.

In a low-growth environment, total return becomes more important. An active fund manager should get better growth than the market. A growing dividend can add a good deal to this bottom-line growth for investors.

In this environment, patience is crucial. If you believe you have identified good companies, you should let the management get on and prove their worth. Fund managers are bombarded by outside influences that can make us doubt our decisions but the good companies will nearly always reward patience. If you get it right, investors benefit from a much lower turnover within the fund.

Overall, I feel optimistic about the prospects for investment. We are seeing a much more favourable economic situation. Much of the necessary cost-cutting has been done and improvements to earnings and potential long-term growth are taking place. There will be challenges, such as the dollar, but this is reflected in reasonable valuation trends.

Recommended

Royal Skandia boosts fund range

Royal Skandia has added eight funds in four currencies to its self-select range.The funds &#45 from companies such as First State, Fidelity and JPMorgan Fleming – include the US equity fund managed by T.Rowe Price.Royal Skandia marketing manager Nic Burton says, “We are delighted to make this fund available through Royal Skandia. Larry Puglia and […]

Keydata makes mark of innovation

Keydata Investments has brought out a guaranteed equity bond that offers investors their original capital plus a return above this when the market goes up or down. The innovative growth plan is linked to the FTSE 100 index for six years. Investors will get their original capital back at the end of the term regardless […]

NAO report allows Revenue pensions simplification

The National Audit Office&#39s report backs up the Treasury&#39s views and paves the way for the Inland Revenue to implement pensions simplification, HR consultants Hewitt Bacon & Woodrow assert. Speaking on the NAO&#39s research into the impact of the £1.4m lifetime pensions cap Hewitt Bacon & Woodrow pensions consultant Andy Cox says the NAO has […]

Woolwich Plan Managers – Woolwich Capital Growth Plan

WOOLWICH PLAN MANAGERS Woolwich Capital Growth Plan Type: Guaranteed equity bond Aim: Growth linked to the performance of the FTSE 100 index Minimum-maximum investment: £3,000-£500.000 Isa £7,000 Term: Six years Return: 25% growth on initial investment or 50% growth in the FTSE 100 index Guarantee: Original capital returned in full regardless of performance of index […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com