Recent good economic data points to stronger than expected world economic growth and should mean dec...
Recent good economic data points to stronger than expected world economic growth and should mean decent stock market returns and good stockpicking opportunities in both Europe and the UK.
Fredric Gautier, a portfolio manager at Fidelity Investments warned, though, that care must be taken when selecting companies, especially when looking at their accounts.
'Check the accounts of any company in which you are consider investing,' he said. 'In small companies, the effect is much more marked.
'Make sure you understand accounting. Look at cashflow statements and be aware of the cycle when looking at companies. When things are tough, don't take what management says at face value, check with lower level employees, customers and rivals.'
While acknowledging that accounting problems, debt and rights issues are heavy on investors' minds, fears on this score look overdone, said Gautier, with most of the risks being on missing the upside.
He said the current cycle can be characterised by overinvestment during 1999 and 2000, excess capacity and stretched balance sheets and the assumption that recovery will be slow and profitless.
'This may not be the case,' he added. 'Business confidence and commodity prices have bounced further than expected, while inflation data has also surprised on the upside.
'Stock markets are being driven by both local and outside events. UK and European companies have been buying up US assets and 26% of FTSE sales are now outside of Europe and the UK, so what happens in the US is very important.
'Technology has also brought markets closer together. Ten-year Eurobond and US Treasuries now have identical yields and, as valuation differences between the UK, US and Europe disappear in a trend towards uniformity, this will give rise to good investment opportunities.'
Gautier said a major theme in the coming year will be the convergence of growth and value stocks. Banks remain one of his favourite sectors.
'While fundamentals are average, with rising bad debts, lower non-interest incomes growth and slower loan growth as rates rise, on valuations, banks are interesting,' he said. 'Current values assume low growth over the next 10 years even though banks have a tradition of beating forecasts on a 10-year view. UK banks in particular look good value. UK banks also score well on a return on assets and price to book calculation compared to European rivals.'
Food retailers are a different story, said Gautier. UK food retailers are more expensive than their European counterparts on discounted earnings.
The market expects UK food retailers to grow at 3% below the average, in line with how they have done, and European retailers to do the same even though European food companies have grown earnings at 6% above the average recently. That makes European food retailers attractive at present, he said.