European stockmarkets look cheap, but for now they will follow the direction of US equities, argues Dresdner fund manager Mark Lovett.
Lovett took over management of the £35 million (Dresdner RCM European Acc) earlier this year following the departure of Juliet Cohn from the group.
He is currently fairly upbeat over European equity valuations, but has chosen to stick with a defensive portfolio of quality companies.
He told Citywire: 'European valuations are quite attractive, relative to earnings, cashflow and other asset classes.
'But we're concerned more about risks in the US, which are not reflected in the US market. We don't think the US is cheap at all.
'European markets will mirror the performance of Wall Street, because concerns about the US market will feed through.'
His fund is therefore positioned relatively defensively, with big holdings in banks. He also likes Spanish construction stocks.
However, he has avoided 'highly-leveraged' companies such as Deutsche Telekom, France Telecom and European utilities on concerns over their acquisition strategies.
Instead he prefers stocks such as KPN and Telecom Italia, whose underlying businesses he believes to be sounder.
He said: 'The market gets excited about these companies' restructuring, but the underlying businesses of Deutsche Telekom and France Telecom are under significant pressure. We'd rather own stocks with stronger cash generation, that don't have the debt burden.'
He also has a much smaller-than-normal position in Germany. 'The structural impediments to growth are quite substantial,' he said. 'Our outlook for German growth is quite subdued.'