The last time that I wrote about European markets was in July. That time my main conclusion was, that in a selective way, it can worth to choose from European stocks, especially by focusing mostly on companies which produce for the domestic market. The jump after the appearance wasn’t selective at all, investors bought everything they reached; fear about the emerging markets and the VW scandal served as another great opportunity for buying as well. A 4-5% increase in Europe in the last few months, for a traditional investor is almost nonsense. In the same time the increased volatility revealed the importance of active portfolio management, which, in my opinion, will valorize in the future.
As we already said it many times, because of the financial oppression, investors are in a difficult situation. Under the current price levels it will be hard to realize real positive returns in the next time period. Regarding the risk-return relationship, in my opinion, some Central-Eastern-European stock can be rather attractive; but we shouldn’t forget that we talk about stock investing, so from time to time the risks must be managed. This was exactly the same before, but that time with the short-term trustworthy bonds, depending on the risk aversion, a few percent fixed returns could have been gained.
However this is entirely changed by now, and it appreciated a lot the active management activities. The significance of market timing will increase; in this environment will have the advantage those, who possess a wider range of assets, in order to manage the risk. On the home market derived stocks could be the most convenient. These stocks can change the exposure to risk quickly, cost efficiently and on a wide range. Respectively by combining sell and buy transactions (spread), these stocks can exploit price differences (arbitrages) which occur periodically on the market.
As I presented in my comment from July, I consider the American markets much more expensive. In addition, more and more signs refer to the improvement of the European booming, which is supported by the low oil prices and the prolonged weak euro. The future of emerging markets is questionable, which can have effects upon the global growth; but in such a situation European countries have bigger latitude in stimulation through fiscal instruments. Moreover, the ECB’s communication, from the end of the last week, confirms that bankers dislike common European currency, stronger than the actual one. In this situation, I think, is worth to cover the portfolio, composed by undervalued European stocks, partly or entirely with sell (short) transactions of the S&P 500 index.
Original date of Hungarian publication: October 27, 2015