Buying European equities or how to catch a falling knife

According to an old stock market saying: « Trying to catch a falling knife can lead to injuries». But when stock-markets are as low as they are now, investors have a safety margin that could be compared to a solid pair of gloves, John Ventre, a portfolio manager at Skandia Investment Group said. He claims that European stocks prices are globally equal to eight times the projected earnings and four times the projected cash flows. No matter the way you look, these securities are cheap and exhibit a bargain compared to 10 years German Bunds, which reached 2.4% (2.30% on Monday 08/08/2011).

« European equities have already been cheap for a while, so why should we buy now? Spanish and Italian bonds yields have slightly decreased these last days, which is encouraging. However, equity markets are depressed for other reasons, especially concerns about the economic outlook. This change in perspective is exciting, because the arguments in favor of performance outweigh the arguments in favor of growth, much more easily than they outweigh the fear of a systemic crisis that would result in Italy defaulting.

Ultimately, European equity markets are clearly underevaluated, like all equity markets. I have accumulated significant reserves waiting for such an opportunity, so for me, the time has come to invest. » he said.

According to John Chatfeild-Roberts, Chief Investment Officer at Jupiter Asset Management, the recent sales in the equity markets were mainly drived by investors anxiety on global economic slowdown. « The main European economic indicators remain under pressure when a lot of central banks in emerging countries, in a concerted move, are raising their key interest rates in order to contain inflation at the cost of a slower growth of domestic consumption.

In my opinion, it is the best way to ensure that their prospects for long-term structural growth remain unchanged. The European sovereign debt crisis also rightly raised investors concerns, in particular as the likelyhood of a quick solution is very low. It is more specifically in such difficult situations that we must remember that companies, as a whole, are in good health. For example, two thirds of the U.S. companies of the S&P 500 have already released their 2011 Q2 results and 73% are beating analysts’ expectations. However, one can easily understand their cautious statements on the markets. We believe, as it is usually the case when it comes to investment, that patience is required and stock prices volatility offers opportunities.

At Jupiter, our approach consists in identifying companies that seem well positioned, on the one hand, to deliver a good performance in the medium/long term, and on the other hand, to emerge stronger from difficult periods of times like the one we are going through », the CIO of Jupiter Asset Management said.