European Absolute Fund - January 2012 update

The European equity market fell 1.6% in sterling terms in December. As in the previous few months, the equity market remained very sensitive to headline news. The unfolding Euro-zone debt continued to be centre stage. The equity market remained more volatile than the monthly performance figure might suggest, although it was less so than recent months.

The Fund lost 2.2% in December. The net exposure of the Fund was less volatile, and although it briefly dipped into negative territory, it averaged the month at a little under 10% net long. The macro concerns remain, with the market carefully watching developments in the eurozone, but the market is increasingly taking EU Summits in its stride; less excitement and optimism ahead of the summits means less disappointment afterwards. The equity market has absorbed a lot of bad news and trades on approximately 10x 2012 estimated earnings. These estimates are probably still a little too high and more downgrades are likely during the forthcoming reporting season, but a number of cyclical names may start to offer upside opportunities. Conversely, a number of defensive names are beginning to look over-bought. The Fund will continue to focus on industry leaders on sensible valuations and with good exposure to the US and emerging markets. On the short side, the Fund will continue to focus on cyclical companies with above-average exposure to Europe, particularly southern Europe.