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Vive la difference

By failing to recognise disparities between European markets, investors risk missing good opportunities

It has become common over the past few months to begin market commentaries by discussing recent volatility in global equity markets. Having no desire to buck this trend, I would like to investigate how European stockmarkets have reacted to the situation. It is clear that there is a wide variance between countries.

Excluding the anomalous outperformance seen in Finland, Greece has been Europe’s strongest performer, rising by 9.3 per cent, while Germany, Spain and Norway have also seen healthy returns over the last three months.

Ireland suffered the sharpest decline, falling by over 9 per cent, while Sweden, Portugal and Belgium also fell into negative territory.

To an extent, these figures mask significant volatility exhibited by markets but it appears that the liquidity crisis and US sub-prime woes have not had a uniform impact across the continent. Instead, individual stock prospects and localised economic performance remain key factors when analysing the mixed fortunes of markets within Europe.

It would be a mistake to labour under the misconception that all banks have been particularly beaten up by the credit crisis. The share prices of most banks have fallen substantially in recent months but there have been some which have continued on an upward path.

The National Bank of Greece has been a key contributor to the strong performance of the overall Greek market. The NBG has only limited exposure to the US sub-prime market, helping it avoid the travails that have beset a significant number of its European competitors. Operating in the fast-growing markets of Greece and Turkey, it continues to post impressive margins and robust top-line growth. Unlike some other banks, its low loan-to-deposit ratio means it does not have to rely on the high-cost wholesale market for funding. Northern Rock’s predicament bears testament to the danger of this.

Such a case highlights the importance of moving beyond the treatment of European countries and sectors as a homogeneous entity.

The decoupling of the global economy has resulted in a situation where it is no longer safe to assume that whenever America sneezes, the whole world catches a cold. Many companies will catch a dose of the sniffles but there are those such as NBG which continue to perform healthily. In the European marketplace, this will reward investors who can identify individual companies set to benefit from continued global growth and/or robust domestic demand.

There are some sectors that tend to perform well during periods of market instability as investors seek those stocks with defensive qualities. Utilities, in particular, have generally performed well over recent months. Within the European utilities sector, there are a number of stocks which are not exposed to the same level of coverage as their British peers.

Sechilienne-Sidec, a French renewable energy company, is covered by only a handful of analysts despite having a market capitalisation of over €1.5bn. Over the past few months, its share price has risen by around 20 per cent as investors warm to the renewables’ theme. Strong performance like this attracts greater coverage for the stock and we would not be surprised to find increasing numbers of analysts seeking to cover it in future. It is important to conduct the fundamental bottom-up analysis which uncovers these investment ideas ahead of the pack.

Investors looking for European funds should target those best placed to exploit the investment opportunities as they arise. Investing in funds that are closely wedded to a benchmark or have other constraints may leave them exposed to countries, sectors and stocks that are struggling in the present climate. They should look for unconstrained funds which can fully exploit the differing prospects in European countries and market sectors.

Hugh Cuthbert manages the SVM continental Europe fund

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