JOHCM: Earnings headwinds affects global economic growth story

Rod Marsden, Senior Fund Manager of the JOHCM Continental European Fund and JOHCM European Fund, shares his thoughts on the outlook for European equities: "The past year has been a difficult time for many parts of the market as we have seen from the looming downturn in industrial growth. Clearly, there has been a lot of bad news to take in, but at least we are now at the point where transparency is at an all time high. Now is the time when we are looking at the possibility of some areas of renewed investment opportunities over the medium term.

"From a macro perspective, there is clearly US recovery potential in the shape of a lower US dollar and the impact that will have on exports and improving trade deficits. While this is not good for the short-term prospects of European exporters, an improving trade deficit picture in the US will ultimately lead to some revival in stock market confidence on a global basis.

"Admittedly, the banking crisis, which is now at its height, is not going to be solved quickly insofar as the lending industry is going to be much more severely regulated in the future. Any pullback in the current level of pessimism could cause a strong upward revision in some of the forms of debt that have been so badly marked down in recent months - of course, the twin forces of improved US exports and concerted government intervention in banking, will be the pillars on which this revaluation will occur.

"Whilst there is skepticism about the ability of BRIC countries to sustain economic growth at the high levels we have seen, strong commodity prices - oil in particular - suggest that this particular ‘pillar' of the global economic growth story is still intact. These sorts of arguments are likely to provide the background for rallies in European markets over the next six months.

"Looking closer at the European markets, one area that seems to be improving enigmatically is consumer spending in Germany; expenditure on low-ticket items seems to be better than it had for many years. So, for the moment at least, consumer spending seems oblivious to the wobbles in global financial markets and a weaker dollar.

"As a whole, I expect European stockmarkets to remain in a trading range through Q2 and Q3 of 2008. Furthermore, it will be increasingly important to look at the market on a stock-by-stock basis given that cash flow arguments have now come back to the fore in a way that has not been seen since 2001/2. I will certainly be looking at the potential investment opportunities before the bottoming in the business cycle occurs."

The JOHCM European Fund and the JOHCM Continental European Fund both aim for long-term capital appreciation through investment in large and medium-sized companies. The investment management style for these funds is a blend of top-down macro analysis and stock specific research.