2009 even more challenging for European equity investors

"2008 was a tough year for investors due to the extreme manner in which share prices fell", say Roger Guy and Guillaume Rambourg, co-managers of the Gartmore European Selected Opportunities Fund and the SICAV Continental European Fund. Volatility hit multi-decade and even record highs. Major indices jumped up and down but no longer surprised investors. However the managers expect 2009 to be an even more challenging period for European equity investors as negative GDP growth and earnings downgrades will be at their most severe.

Under these challenging economic and market conditions, Roger and Guillaume are focusing on sticking to large cap stocks which tend to have stronger balance sheets. "Balance sheet strength allows companies to retain more control over their destinies, enables better access to credit and reduces counterparty risk". They add that "strong balance sheets give companies better operational ability for example these companies can choose to invest while others are forced to make cut-backs. Dividends are also likely to be better underpinned".

As part of their strategy, Roger and Guillaume have targeted quality stocks within the healthcare sector which they consider attractively valued with less risk of earnings downgrades this year versus a market likely to suffer from huge earnings downgrades over the mid to longer term. They believe that the healthcare sector represents a growth area. Growth stocks have and will continue to offer earnings stability and more resilient dividends this year according to the managers. The sector's strong capital position and high free cash flow will further support share prices while credit markets remain tight and is another key attraction of this sector. Strong fundamentals, a favourable M&A environment and limited economic sensitivity are major positives. Roger and Guillaume currently find value in pharmaceutical companies Novartis, Roche and Sanofi-Aventis. "Particularly attractive stocks are those which are naturally cash generative. Stocks with strong balance sheets are only valuable if the underlying business of that company continues to produce good revenue streams", say the managers.