European Fund Mgrs See Equities As Good Bet For Recovery
By HENRY E. TEITELBAUM
Dow Jones Newswires
PARIS -- With European equity markets still in full
retreat as the fourth quarter begins, a fund manager
would seem very brave or foolish to be betting on a
bounce.
And most aren't, at least not until they see shares
stabilize.
But while clearly not immune from weakness elsewhere
on the globe, fund managers say European shares remain
among the best bets in the medium term, benefiting from
corporate restructuring, low interest rates, a developing
equity culture and a decent level of economic growth.
"We think there is very good value in the market, which
is not too far from the bottom," said Philippe Alter, chief
investment officer for CCF Capital Management in
Paris. But he added, "We are looking for less volatility in
the market before coming back."
Alter said that for him to feel confident investing in
European equities, he would like to see daily average
market volatility fall to the 1%-to-2%-range from the
5%-range where prices currently fluctuate.
European stocks were hit harder than the U.S. in the
third quarter, with the Dow Jones Stoxx Index of 50
leading European securities falling 16% in the period,
compared with 13% for the Dow Jones Industrial
Average.
The market selloff in Europe was as unexpected as it
was dramatic.
Jean Francois de Laulanie, director of investment
strategy at Societe Generale Asset Management in Paris,
explains that until July, turmoil that had gripped Asia and
Japan and was even starting to hurt the U.S. was
relatively easy to ignore in Europe because of
companies' low exposure to the region.
But one month later, the crisis in Russia hit much closer
to home. "The Russia crisis was like a bomb," he said.
"People began to think Europe could be the same as
Japan and the U.S."
That's when U.S. pension funds, with their heavy
placement capacity, began to significantly liquidate their
European share holdings, Societe Generale's de Laulanie
said.
"What is small for a U.S. pension fund is quite large for
European stocks," he said, noting that France and
Germany each account for only about 4% of the global
equity market.
Beyond these investors, CCF Capital's Alter said
European balanced funds that "were overweight stocks
relative to the benchmark went back to equal"
weightings, while stock market funds moved toward
defensive positions by dumping shares in riskier
companies.
Societe Generale's de Laulanie said that during
September, selling of European stocks took on a new
dimension after profit warnings were issued at Royal
Dutch Shell NV (RD) Alcatel SA (ALA), and Royal
Philips Electronics NV (PHG).
"People began to be skeptical of earnings forecasts in
Europe," de Laulanie said. The recent near-collapse of
Long-Term Capital Management (LTCM) "is adding
uncertainty" to the mix, he added.
The remedy, as de Laulanie sees it, are "reliable"
earnings figures, which may not start to become available
for another month or two. In the meantime, he said, "we
could still have some big volatility," and until that starts to
decline, "we don't suggest fund managers jump back into
the market."
Chris Wheeler, European sales and marketing director
for Guinness Flight Hambro, a U.K.-based asset
management company recently acquired by South
Africa-based Investec Group, says companies
themselves could do more to support stock prices by
boosting merger and acquisition activity and following
through on share buyback programs they have recently
announced.
"What tends to happen in Europe is they announce it, but
then don't do it," Wheeler said.
Nevertheless, he too sees the European market as near
buying levels.
"We do think there is a strong case for being bullish on
equities," he said. "What we're looking to do is buy on
dips" while waiting for the investment pendulum to "start
to swing a little more in the other direction."
Guinness Flight's Wheeler said central banks in Europe
could help calm market fears of slowing growth by
following the Federal Open Market Committee example
in cutting rates. The FOMC on Tuesday cut its Fed
funds rate by 0.25 point to 5.25%, while the
Bundesbank on Thursday left its repo rate at 3.30%.
But even without rate cuts, European growth remains on
a reasonably solid footing, fund managers say.
"The bulk of earnings growth in Europe is from domestic
demand," Societe Generale's de Laulanie said. "We
don't see any probability of a big slowdown in 1999."
European gross domestic product growth is expected to
fall to an average 2.8% next year from 3% in 1998, the
International Monetary Fund said Thursday. But that
would still be well above the rate in most of the rest of
the world.
While waiting for calm to return, CCF's Alter notes an
encouraging sign in the behavior of French retail
investors, whom he says have largely stayed the course
in their stock investments.
"So far we have seen very few redemptions by individual
investors," he said. If anything, Alter said the kind of
volatility that has hit stock prices in Europe should
encourage new fund inflows by convincing investors that
"it's very dangerous to be in a single stock."
Guinness Flight's Wheeler said he's encouraged by the
behavior of German retail investors, who "have caught
the equity bug" in recent years and are now buying
stocks through life insurance, mutual funds and defined
contribution products to save for their retirements.
Beyond these changes, he draws encouragement from
money market and longer term yields that are still falling.
"Long-bonds yields have been doing very well," Wheeler
said, but with the yield on a 10-year German bund at
3.80%, he asked "how much further can they go?."
-By Henry E. Teitelbaum, 33-1-5300-0303;
hteitelbaum@ap.org
|
