Investors warned off contrarian European play

OneWayAs the outlook for European markets falters, with Greece, Portugal and Spain hitting headlines, contrarian investors tempted to make the most of the current environment are being warned against it.

Sovereign bonds issued by these troubled countries have fallen in value, the euro is suffering and stock prices across European markets are also under pressure.

Gregg Wolper, a senior mutual-fund analyst with Morningstar, the fund advisor, said: “Such overwhelmingly negative news often prompts canny investors to think of ways to benefit, to take the contrarian path.

“But that doesn’t mean you should rush to buy a Europe-stock fund. For one thing, most of the region’s stock markets haven’t fallen all that far, and the euro isn’t even close to its historic low. Further declines are hardly out of the question.”

Wolper noted that by and large, Greek and Portuguese stocks play almost no role in international funds and several investors may already have a significant exposure to European markets through other funds.

But Alexander Scurlock, portfolio manager of Fidelity’s European Growth Fund, said: “The ongoing crisis in Greece has affected sentiment towards European equities. It has also somewhat obscured the good news coming out of Europe, such as a recovery in global trade, inventory rebuild and a more competitive currency.

“Indeed, industrial production within Europe is running at impressive levels, while strong exports and high margins are likely to provide a further boost to company profits as the recovery unfolds. Furthermore, inflation remains subdued, which should mean that monetary policy stays accommodative for longer.”

In the beginning of May, Greece reached agreement with the International Monetary Fund the European Commission, and the European Central Bank for a €110bn financing package.

Scurlock said: “As credit concerns about peripheral countries ease, and the EU/IMF package for Greece falls into place, the chance of debt-restructuring should reduce significantly. As a result, we could see markets improve on the back of strong earnings growth and attractive valuations.”

©2010 funds europe