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European stocks are ‘crazily cheap’

A pause in the stock market rally is due though, says Cazenove European Equity fund manager Chris Rice.

European stocks are ‘crazily cheap’

The European stock market still looks ‘crazily cheap’ compared to the US despite a sharp rally in European equities since the summer, says Cazenove European Equity fund manager Chris Rice

Rice expects large value stocks to remain the best performing sector in the market for a while longer, but thinks a modest correction of between 5-10% is due in the near future.

‘A pause is overdue... If corporate profitability continues to hold and volatility remains low, Europe’s second half rally should continue,' Rice told Citywire.

'We expect large cap value to be the best performer in the next setback.’

Recycling into defensive 'stodge'

Rice has been taking profits on his 'cyclical' winners of the past six months (cyclical companies are those more exposed to the economic cycle) and is gradually moving back into what he calls more defensive large cap ‘stodge’.

The move has seen him go from an underweight in oil companies to an overweight, with French oil giant Total and Italian peer ENI representing key holdings. Deutsche Telekom now represents the largest overweight position in the fund.

‘We have not gone long on defensives yet but are starting to move back towards things that have been relatively derated.’

With a keen focus on where stocks are in the business cycle, Rice is looking to stick with companies that are trading at below 20x earnings and took the portfolio overweight on cyclicals last August with a number of selective quality growth stocks increased.

In the top 10 positions, quality growth stocks include third largest holding and long-term favourite Campari, French media giant Publicis and chemicals and cosmetics group Henkel.

Rice likes Henkel as it is ‘not as aggressively priced as L’Oréal’ and he stresses that despite strong runs, many of his other core quality growth holdings are still not too expensive, despite strong reratings in the second half of 2012.

‘BIC was at 12x earnings and it is now at 16x and SAP is trading at 18x earnings.’

Luxury goods group LVMH was added to the portfolio recently. Despite concerns over a marked decline in the consumption of luxury goods across much of Asia, Rice is not too concerned about the stock, which is trading at around 17x earnings.

‘There is no doubt that demand for luxury has gone down. Goods such as cars and luxury products are classic “wall of worry” stocks that people often fear can’t keep going.

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