Tight credit conditions, weakening consumer demand and rising unemployment will leave Europe facing very tough headwinds in 2009, say top European fund managers.
Speaking to Citywire, a number of leading European managers in the industry said they are also concerned that the recession is going to put a lot of strain on export-orientated markets.
Schroders' head of European equities, Gary Clarke, said he is particularly concerned about how a slowing export market will impact Europe's growth.
He said: 'Over the last decade, Europe has relied heavily on exports for GDP growth as its domestic economy remained relatively constrained. Consequently, as major world regions head into recession and the emerging markets experience a significant slow down, one of Europe’s major sources of growth will slow significantly.
'The euro has weakened more recently against the dollar and this will help the pricing competitiveness of exports, but it will not be enough to offset the lower activity levels. In particular, Europe will be badly hit by the severe slowdown and credit issues in Eastern Europe, an important export market for Western Europe.'
Clarke said tighter credit conditions will lead to an increasingly restricted borrowing environment for both the consumer and corporate sectors. The squeeze, coupled with fears of unemployment, will see savings become a bigger concern, further dampening European consumer spending, he said.
LV= Asset Management's Kathryn Lilley agreed that limited credit and changing attitudes to savings among consumers would serve to create problems for the European economy in the long run.
Lilley, who is A-rated by Citywire, said: 'The consumer will be unable to get the credit they could get previously and they certainly won't be able to spend as they once did. I think the pressures we have been seeing in the past 18 months are going to continue and we are staying quite defensive with an adversity to consumer staples in light of these concerns.'
Meanwhile, head of European equities at Ignis Asset Management, Adrian Darley, said that after such a volatile 2008 the key question for investors is not where earnings will bottom but what is already priced into company valuations.
He said: 'There is a danger that a myopic focus on how bad 2009 may be, could lead to similar mistakes made in 2003. This resulted in a focus on difficult short-term news flow and investors missing out when European equity markets subsequently rose more than 37% in just eight months, based partly on falling interest rates.
'This is not to underestimate the global challenges many companies presently face. It does, however, highlight that, as in previous cycles, policymakers are reacting fast. This time they are spending money and cutting interest rates more aggressively than ever before. The credit crunch will slow the speed at which this feeds through into economic growth, but the policymakers’ actions will undoubtedly make a difference. There have also been recent examples of shares rising significantly on so-called bad profit warnings, which is a clear sign that investors are starting to see through the fog.'
Darley added that he thinks investors entering the year positioned defensively should re-consider their strategy and begin to tip a toe in less defensive areas.
He said: 'At this stage it makes sense to enter 2009 with a more balanced and less defensive portfolio than was appropriate in 2008. This means slowly increasing cyclical exposure through financial and industrial stocks, with individual stock selection vitally important. After such large stock market falls there are always excellent investment opportunities.'