Greyhound fancier Stephanie Gerrard is betting a restructuring Europe is ready to go to the races. The Aberdeen Asset Management fund manager says there is the secular story of the euro igniting a wave of mergers and acquisitions, which is boosting stocks, and the cyclical story of the European economy 'which is definitely picking up'. 'We are looking for 15 per cent EPS [earnings per share] growth next year, with a [price-earnings] multiple expansion on it. You really get quite big numbers on what you could hope the market might do,' said Ms Gerrard, who races greyhounds in London as a hobby. 'You've seen a big discount on the European market to the US of 20 to 25 per cent on a multiple basis. 'Part of it has been because the Europeans have been so inefficient and partly because the US has been more open. You can only say that gap should begin to close.' On the cyclical side, sluggish continental European economies are showing signs of stirring. Gross domestic product growth in Western Europe is expected to come in at 2 per cent this year, rising to 2.5 per cent next year. Consumer confidence and GDP are rising in France while the key German economy is expected to 'snap back' to 2.5 per cent or 2.6 per cent growth next year from 1.5 per cent this year. 'If anything, the danger is to the upside,' said Ms Gerrard. Perhaps even more importantly is that corporate Europe is finally dancing to the United States' tune of return on equity, shareholder value and good corporate governance. 'One could have said for the past five or six years that there was a restructuring story to be told. This time we have got evidence of it coming through,' said Ms Gerrard. 'I think what you are seeing is the first moves towards the US model which is the promised land in terms of stock performance.' The turning point for her was the takeover earlier this year of Telecom Italia by its domestic rival Olivetti, a rare instance in Europe of a hostile bid being made and succeeding. Ms Gerrard, who manages Aberdeen's Hong Kong-authorised Global European Equity Fund, and her three colleagues on the firm's European desk took profits on Telecom Italia after the bid was announced. They foresaw that other minority shareholders would be lured by the cash offer but did not relish the prospect of a highly leveraged Olivetti managing Telecom Italia. 'In retrospect it was a horrible deal,' said Ms Gerrard. 'What we have seen is that Olivetti are stripping the assets out of Telecom Italia and sending them back up to the holding company which is Tecnost and, therefore, [we have] seen Telecom Italia shareholders losing out.' Other deals, such as the merger of French oil firms Elf and Total and retailer Carrefour's takeover of Promodes, were showing the way, she said. 'The creation of the domestic champions is a crucial precursor to cross-border deals,' said Ms Gerrard. 'We are quite early on in this M&A [merger and acquisition] phase in Europe.' She again compared Europe to the US, where regional companies in each sector would be created by consolidation before they eventually became continent-wide. The advent of euroland meshes well with Aberdeen's investment strategy. 'It is very much on sectors. Europe is, to our mind, one market. It makes much more sense to compare stocks against their peers than their home market,' Ms Gerrard said. 'It makes no sense to compare Nokia against the Finnish market. It makes every sense to compare it against Motorola and Ericsson. 'We are very top down. We start with a view on the macro environment. From that we decide where we are in the economic cycle. Then we drop down to sectors and decide where we are going to overweight on the back of that,' she said. But Aberdeen's European team keeps the allocations in the benchmark FT S&P Europe-ex UK index very much in mind. 'We are quite controlled in the risk we take,' said Ms Gerrard. 'Officially, we can go plus or minus 5 per cent over the index for an individual sector. But we get nowhere near that. We keep it much tighter than that.' Based on Aberdeen's macro view of Europe, the fund this year went overweight on basic industrials, energy and consumer cyclical stocks to play on the economic upturn and the weak euro making exports competitive. The fund went underweight on telecommunications stocks, as valuations 'had got stretched'. Financials were also underweight as it was expected they 'would act badly in a poor bond environment'. While adjusting the fund's sails to cyclical themes, Ms Gerrard has three secular themes which she is overweight on: technology, media plays and managed savings. Europeans are moving their money out of bonds and into mutual stock funds, mirroring a trend well advanced in the US. 'There are certain plays on that like Skandia in Sweden and Fortis in Holland,' said Ms Gerrard. While not consciously allocating cash on a country basis, the fund has been underweight on peripheral European countries such as Ireland and Portugal. Investors should not worry about the euro, which had a shaky start on the forex markets. Aberdeen expects it will be back up to 1.15 to the US dollar by the end of next year as European politicians learn that it is not in their interests to rock the European Central Bank's boat. Stephanie Gerrard 1993: Graduated from Cambridge University with degree in history 1993: Begins with Lazard Brothers in London 1994: US fund manager with Lazards 1997: US fund manager with Prolific, then taken over by Aberdeen Asset Management 1998: European fund manager with Aberdeen
