Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Peter Jarvis, manager of the F&C European Dynamic Fund.
The impact of the credit crunch continues to filter through to the real economy. The recent results season in Europe, for example, has seen a succession of profit warnings with companies citing broad-based weakness. No one knows how long or deep the recession will be, but there’s little doubt the commercial environment is likely to remain challenging. Meanwhile, the dramatic events of September and October – including the collapse of Lehman Brothers – have led to near capitulation in the equity markets. Policy responses have ranged from governments underwriting deposits in their banking systems and recapitalising (or nationalising) banks and financial institutions, to coordinated rate cuts from many central banks.
The growing gap across Europe between the core and peripheral markets is an added worry – Germany and France, for example, have demonstrated far more resilience than Spain and Ireland, which both share worrying similarities with the UK. In all three cases, a boom was driven by construction and property with the well-documented downturn in these areas leading to inevitable fall-out.
In this tricky climate, investors should focus on companies with strong balance sheets, a defensive earnings profile and robust cash flow. This should ensure they weather any further deterioration in the economy. Investors should also consider each stock very much on its individual merit. In the short-term, markets will remain volatile and trading erratic while the market digests the full details of the anticipated government liquidity plan. Valuations look attractive across Europe and remain low in both historic and absolute terms. Many companies are able to demonstrate good earnings support and high dividend payouts.
The first stock I like is Dutch company Wolters Kluwer (Amsterdam:WKL), a multinational publisher whose core markets include accounting, corporate, financial services and legal. It has a fairly defensive business model and a high dividend payout. Additionally, the organisation is a big dollar earner, which is useful given the current strength of the US dollar versus the euro.
Secondly, I like Advanced Digital Broadcasting (SWF:ADBN), which provides digital set-top boxes for the cable and satellite TV industry. The firm’s specialist knowledge is built in to its software; it has released some fantastic products in recent months and is on course to become market leader. Along with exciting product development, the company has landed some good contracts in the US this year despite challenging conditions. The company is well set to benefit from the eventual pick-up in US consumer spending over the next nine months.
My final stock is Sevan Marine (Oslo:SEVAN). What makes this company unique is its product – a cylinder floater, suitable for all offshore environments, that floats over oil wells and brings the oil up out of the ground. Importantly, this new design is more cost-effective to build than the competition and several of these new floaters are already in operation. The company’s shares have been sold off aggressively amid fears over debt financing. But we believe now is a great opportunity to buy as the fundamentals suggest that it is currently deeply undervalued.