Mark Dampier: Will the markets recover? Of course

The Analyst

One can spend considerable time worrying about whether Europe is better than the US, or whether the UK is likely to outperform Japan. The trouble is that nobody really knows that, and those who think they know are usually wrong.

Identifying a quality fund-manager is a more realistic prospect. In fact, in many cases it's the fund manager I analyse rather than the fund itself. This week, I will look at the Cazenove European Fund under the stewardship of Chris Rice.

Rice has been running this fund for six years, and has 16 years of investment experience. In my opinion, he is easily one of the top European fund managers and should be seriously considered by those seeking an investment in the region.

Right now, perhaps you are thinking I am completely mad. Who would want to buy shares now? Isn't the world coming to an end? Well, when markets establish a clear trend people can never imagine that trend reversing. During a bull market, people seem to believe it will rise for ever, and when we're in a bear market, people reject the possibility that it will ever rise again. Experience tells us that both viewpoints are wrong.

Chris Rice's style is to run a diversified portfolio of shares in large and medium-sized companies. He looks carefully at the business cycle and tries to match his stock picks to where we are in the economic cycle. This is not an easy thing to do.

When I caught up with Rice last week, he said he saw three different cycles at the moment: economic; corporate; and valuation.

The valuation cycle brings some positive news. The start of 2009 saw the market valuation at around the third-lowest it has been in its history, with share prices at around 7.5 times earnings on average. From that point of view, the market appears cheap. However, we are not quite out of the woods yet. Rice believes that any recovery in the short term could be sharp, but we are not yet at the stage of a sustainable rally.

It seems we still have some way to go before we reach the bottom of the corporate earnings cycle. Perhaps we are halfway through the traditional peak-to-trough fall in earnings, but most of the fall so far has come from the financial sector. Other parts of the economy have not suffered to the same degree, so this is something to keep an eye on in future.

Turning to the economic cycle, governments are doing everything (and anything) they can to try to halt this economic decline. Their somewhat confused approach is causing bafflement among investors and is doing nothing to help confidence in the stock market.

Rice's view is to be overweight in large, well-capitalised defensive companies with little or no debt. He particularly does not want to invest in companies that were exposed to the huge boom in emerging markets, as their earnings of the past few years clearly cannot be repeated in the short term. So his portfolio is full of pharmaceuticals, telecoms and food stocks.

The key factor is what will happen in the financial sector; until it stabilises (whether via recovery or total nationalisation), it is hard to see how the markets can make any headway.

Given all this bad news, I did ask Rice whether it was worth even investing in Europe. While he admits that the next six months is extremely foggy, he remains a believer in the long-term potential of the stock market. I share that view, and in my opinion top-class managers such as Chris Rice are the people to see investors through.

As I have said before, it may be wise to drip money into the markets gradually and to remain committed to a time horizon of at least five years – 10 would be even better.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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