There are several reasons to be “a bit more positive” about the economic outlook than there were a few months ago, says Feras Al-Chalabi, manager of CF Odey Continental European fund. Central banks are cutting rates, mortgage costs are falling, and on 8.5 times trailing earnings, equities are trading at levels not seen since the early 1980s.
“What stops me from being unbridledly bullish, though, is that this is a consumer-led recession, which tends to be longer and deeper than a cyclical one.” More importantly, it is the result of a banking crisis, “which tends to be followed by two years of negative output”.
That means European company earnings are likely to fall by 45% this year, he reckons, from their peak in 2007. But markets have recognised this and “valuations have fallen to a level that now discount the fact that we are entering a recessionary period”. That’s thrown up some interesting plays, including Spanish IT and defence contractor Indra Sistemas, which trades on a forward p/e of 14. He also likes telecoms because “they know what a recession looks like, have had five years of falling prices and the regulator on their back and have learnt how to cut costs”. A favourite is Dutch group TPN.
A graduate of Brasenose College, Oxford, Al-Chalabi “may manage a fund that has dropped 6.7% this year, but the index is down about 30%”, says Ben Yearsley of Hargreaves Lansdown. “On that basis, I’d very happily pay up for him” to manage my money.
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CF Odey Continental European Fund – top ten holdings
| Name of holding | % of assets |
| CIBA Holding AG | 5.8 |
| Koninklijke Kpn NV | 4.1 |
| Snam Rete Gas | 4.0 |
| Munchener Ruckversicherun GS AG | 3.5 |
| Allianz SE | 3.0 |
| Koninklijke Ahold NV | 3.0 |
| Colruyt SA | 3.0 |
| Zurich Financial Services | 2.9 |
| Swedish Match AB | 2.5 |
| Novo-Nordisk AS | 2.5 |