Have European shares fallen far enough?

By Daniel | March 18, 2008

Have European shares fallen far enough?

Strategists see some bright spots in Europe’s higher quality, large-cap assets

By Sarah Turner, MarketWatch

Last Update: 6:34 AM ET Mar 18, 2008

LONDON (MarketWatch) — As the U.S. economy teeters on the edge of recession, the
credit crisis continues apace and global equity markets swing wildly, some
strategists say the picture is not completely bleak for the European stocks.

Stocks on the Continent and in the U.K. have fallen sharply since the start of
the year. The Stoxx 600 index (ST:SXXP) of leading European companies is
currently down about 19% since the start of the year, adding to declines made
since last summer.

However, at least one strategist is saying share prices may have fallen far
enough, for now.

Darren Brooks, European portfolio strategist at Citigroup, said it’s becoming
harder for investors to short European equities, and is now looking for a floor
to falling share prices.

“It will be hard to find one in economic or profit data over the next three to
six months, but lower valuations, rate cuts and long-term capital buyers make it
tougher for investors to short equities,” he said.

Brooks noted that European equities are trading on a price-to-earnings ratio of
between 10 times and 11 times 2008 estimates.

He argued that because a 30% to 35% drop in earnings would lead to an average
adjusted price-to-earnings ratio of around 15 times, the market has priced in
much, if not all, of the expected bad news.

On a stock basis, Citigroup strategists favor companies that have high visibility
on earnings, which they also believe they will also perform well in periods of
higher inflation.

These include chemical firms such as Dutch-listed Akzo Nobel (NL:00913),
Germany’s Bayer (DE:519000) and Switzerland’s Lonza (CH:001384101),

They also like U.K. tobacco giants British American Tobacco (UK:BATS)(BTI) and
Imperial Tobacco (UK:IMT)(ITY), food retailers such as France’s Casino
(FR:012558) and the U.K’s William Morrison (UK:MRW), and Swiss food producer
Nestle (CH:001205604).

Also on the list are French train-maker Alstom (FR:ALO), U.K. aerospace and
defense interest BAE Systems (BAESY)(UK:BA), Danish wind power firm Vestas Wind
Systems, German utility giant E.On (DE:761440) and hedge fund manager Man Group
(UK:EMG). Danish insulin maker Novo Nordisk and medical device firm Smith and
Nephew (UK:SN)(SNN) are also favored.

Inflation globally has been ticking up recently, in part due to soaring commodity
prices, presenting another headache for central bankers.

However, this isn’t expected to stop central banks around the globe cutting
interest rates as they battle to shore up economic growth.

The Federal Reserve on Sunday made a rare quarter-percentage-point cut to its
discount rate, bringing it down to 3.25%, while at the same time offering to lend
money to a longer list of firms than ever before.

The U.S. central bank meets again on Tuesday and is expected to slash the federal
funds rate by at least three quarters of a percentage point, with many now
expecting an extremely rare cut of one percentage point

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