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Every week, a professional investor tells MoneyWeek where he'd put his money now. This week: Cedric de Fonclare, manager of Jupiter European Special Situations Fund and Jupiter European Opportunities Fund
The US slowdown is starting to affect Europe. A strong euro, rising inflation and weak consumer sentiment look set to create headwinds for some European firms. As a whole, the European market trades at around ten times this year's earnings and has a dividend yield close to 4.5%. While these are attractive valuations, there are a number of reasons why investors remain wary. First, corporate profits of cyclical firms have been at record levels. Having bagged an unusually high share of the eurozone's economic wealth, many expect a return to a more normal level as profits get squeezed. Second, analysts have been slow to downgrade their estimates for company earnings in 2008 and 2009. When they do, this could prompt further falls in some share prices.
I was concerned about this and moved early out of debt-ridden cyclical stocks in 2007. This was at a time when their shares were being driven ever higher by mergers and acquisition speculation, which couldn't last forever. Aware that the profits of cyclical businesses can fall sharply, I ensured my funds held few banks, consumer, construction, engineering or technology firms and no auto firms or airlines. I started building positions in companies I believe will enjoy steady growth over the next few years because of strong underlying global demand for their goods and services. These companies tend to have little debt and often prove more profitable than analysts expect. Furthermore, their shares are often lowly rated. This offers investors greater opportunities for an upwards re-rating, while providing some protection from severe falls in share prices.
With economic growth likely to slow, investors will take a greater interest in firms with clearly visible profitability, operating in strongly growing markets. Here are three examples:
Vallourec (CAC 40:VK) is a global supplier of specialist seamless steel tubes to the oil and gas industry. Interest in oil and gas exploration is at a level not seen for 30 years. Vallourec enjoys good pricing power; it operates in an oligopoly reinforced by strong barriers to entry. It should benefit from the discovery of a large offshore oil field in Brazil as it is the only local supplier of premium piping. The company has cash on its balance sheet and good visibility of earnings, while the shares are attractively valued.
Fresenius Medical Care (DAX:FME) is the world's largest provider of products and services for people undergoing kidney dialysis. The number of such patients is rising by 5%-6% a year, driven by longer life expectancy and a rise in diabetes and high blood pressure – the main causes of kidney failure. In America, changes to Medicare should also benefit the firm, while emerging markets offer growing opportunities as their populations become wealthier.
Syngenta (Zurich:SYNN) is a global leader in crop protection. The world's population continues to grow and is eating more meat. Yet in much of the world, agricultural land is limited and water scarce. Tomorrow's farmers will have to grow far more food and animal feed with today's resources. Farmers must increase their crop-yield per field. Yields in emerging markets are usually half or less than those in Europe and America, while in Brazil, there is a shift to producing two crops a year – which should drive demand for Syngenta's insecticides, herbicides and fungicides for many years.
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