Forecasts might underestimate impact of euro strength

Consensus earnings forecasts might be underestimating the negative impact of the Euro's strength against Sterling and the Dollar, according to Peter Jarvis, manager of the F&C European Dynamic Fund.

"Exports have been one of the main drivers of the European economy during the last few years and the strength of the currency is a risk to earnings over the short to medium term," said Jarvis. "This combined with the current turmoil in the credit markets and fears about the depth of the US recession, means we expect European markets to remain very volatile with some core economies such as France and Germany showing more resilience than others such as Spain." The upcoming Q1 earnings season, he added, will be crucial for assessing the impact of the recent financial turmoil on the wider market.

On the positive side, Jarvis believes valuations of European stocks are not too stretched and yields are relatively attractive, with M&A activity still high. "We have recently seen some high profile deals such as Dutch temporary employment agency Randstad buying rival Vedior which shows corporates are seeing value in the markets at current levels," he added.

Jarvis explained he remains cautious on the financial sector overall but has built up positions in attractively valued stocks such German property company Hypo Real Estate.

"Elsewhere we are positive on the oil & gas sector as demand from emerging markets remains strong. We recently added Repsol, Spain's largest oil company to the portfolio" he said. "Our conviction to certain oil support services continues to be strong and we remain overweight in specialist oil drilling operations with a focus on companies with visible earnings and ongoing potential such as recently bought stocks Petrolia and Petromena." Jarvis is also finding opportunities in oil exploration companies such as Portugal's Galp.