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Cazenove's Rice banks on third-quarter value rally
Cazenove European manager Chris Rice expects to see a significant value rally in the third quarter, so he has been upping his weighting to value stocks.
Cazenove European manager Chris Rice has been selling down his stakes in food producers Nestlé and Unilever (ULVR.L) to increase his weighting to European telecom firms as he gradually increases the value tilt of the fund.
Positions in Unilever and Nestle, where the fund was previously overweight, have been reduced dramatically in recent weeks, and Rice has boosted Deutsche Telekom to become the fund's fourth biggest overweight. He also has overweight positions in smaller companies Belgekom and France Telecom.
Cazenove European is a pick of Citywire Selection, although following a recent period of weak performance it has been placed under review.
Time to buy telecoms?
The telecoms sector represents about 7.5% of the fund, and Rice believes European telecoms are now at the lowest point in the cycle in terms of sales revisions. 'All the structured parts of telcos have moved in a positive direction over the past two months,' he said.
He cites Mexican investor Carlos Slim buying into KPN and Telecom Austria as a sign of growing interest in investing in the sector, and competition 'has been rationalised' by mobile firm Iliad entering the French market and forcing rival telecoms businesses into network sharing.
'They are trading at eight or nine times earnings, dividends are enormous, earnings per share are bottoming and newsflow is improving,' he said.
Value rally in third quarter
The fund is currently balanced between value and growth stocks, but Rice expects to see a significant value rally in the third quarter of this year so has been slowly upping his weighting to value stocks.
Adding to Deutsche is Rice's first move to increase his allocation to stocks that have underperformed over recent months, but he will look to start adding further to such stocks through the summer, as he reduces his weighting to out-and-out growth stocks.
'We are making a start with Deutsche, but need to be ready to buy companies like Renault and AXA,' he said. 'We have had a little turnover in growth stocks. They have been trading in a range between 13 times and 18 times earnings, and we have been using them to trade, but we are still avoiding peripheral Europe. We are looking for companies where the cycle is some way away from being dependent on whether the euro survives.'
To this end, Rice has recently added a couple of medium-sized niche Swiss textile firms, Oerlikon and Rieter, as 1% positions, as well as EVS, a Belgian outside broadcast specialist.
'The spin cotton industry is dominated by India, Turkey and China, but inventories of cotton and polyester are now quite low and we think small and mid-caps are not as structurally overvalued as a sector. We think stocks like these are relatively early stage in the profits and earnings cycle.'
Price of security 'too high'
Rice believes that many of the long-term growth stocks in Europe are trading at ever-higher multiples and pricing in the potential for investors to lose a lot of money. He also thinks many European managers are chasing the same high-growth stocks and have now become highly correlated.
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