Making money in the eurozone

May 25, 2006

Andy Lynch, manager of Schroder European Smaller Companies Fund tells MoneyWeek where he’d put his money now.

We are finding good opportunities in countries benefiting from low and stable eurozone interest rates, in particular some of the economies on the periphery of the region, such as Ireland and Greece. Real estate companies are looking especially attractive - we particularly favour Greek company Babis Vovos (listed in Stuttgart, ticker: 675683), which we bought last November.

When investing, we look for pockets of pricing power where demand for a product is exceeding the supply. Babis Vovos is a good example. The growing Greek economy and low interest-rate environment is creating strong demand for property, particularly in the commercial market. Babis Vovos has good exposure to this, supplying business offices to multinationals such as Vodafone, which is expanding into Greece. We expect the company to continue to benefit from this trend. It also supplies high-end residential homes, another area that should see strong growth in the years ahead.

We are also keeping an eye on the high oil price, which has been boosting the profits of major European oil companies such as Royal Dutch and France Total, and raising cash levels. A lot of this cash is being returned to shareholders through share buybacks and increased dividend payments, but it is also leading to increased capital expenditure budgets. A large amount of this is being spent on exploration and production as firms continue their search for new oil fields. One way of gaining exposure to this in the smaller companies market is by investing in stocks in the oil-services industry, which are direct beneficiaries of this increased spend.

A firm we particularly like at the moment is Dutch company Fugro (quoted in Amsterdam, ticker: 35253). The firm carries out early-stage seismic surveys for oil majors - collecting data at sea and on land - which is used in building offshore oil platforms and pipelines. The firm recently won a significant contract for exploration in Nigeria and has reported that profits may have increased by just under 50% in 2004. We feel demand for its services should remain strong for some time yet.

We are also interested in increased asset gathering and saving by private individuals across Europe. We like Azimut (listed in Milan, ticker: 326169), an Italian asset-management firm based in Milan with clients mostly in the wealthier north of Italy. We bought the stock in July 2004 as part of its initial public offering. Pension reform and the increased need for private pensions offers opportunities for Azimut, and although it operates in a competitive environment, it is in a growing market with strong demand that should ensure high levels of pricing power.

Finally, consider Geberit (listed in Stuttgart, ticker: 922734). This is a Swiss-based firm that supplies drainage and flushing systems for commercial and residential construction firms across the continent. If you travel in airports across Europe, you’re more than likely to see Geberit’s name on the automatic flushing systems in the lavatories. When dealing with companies in the plumbing industry, pricing power is most certainly in the hands of the supplier. This is no exception when it comes to Geberit, which enjoys very good pricing power. The company has a strong position in most of its markets, is focused on generating good returns on capital and is a great growth story

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