Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Mark Page, co-manager, Artemis European Opportunities Fund.
In a fast-changing world, chasing every up and down move in the market is foolish. It can cause investors to adopt overly aggressive positioning just ahead of a market top, and to become overly cautious just before a recovery.
Stocks should be bought or sold on their own merits, rather than on the basis of a top-down view of the world. This is why we buy stocks based on the total return we expect them to produce over five years, based on conservative assumptions about the firm's potential for growth and profitability and its valuation.
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All else being equal, an increase in a potential investment's share price will lower the total return we expect; and a fall will increase it.
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The beauty of this approach is that it creates a level playing field for potential investments. When we launched our fund in October 2011, big defensive growth stocks were attractively valued. So, companies like SGS, Bureau Veritas, L'Oral, Schindler and Kone were among our key holdings.
But by late 2012, some of these masters of their own destiny' were in danger of becoming overvalued. At the same time, some lower-quality, cyclical, Europe-centric stocks had become too cheap to ignore.
So we bought holdings in EDF, M6, Vivendi, Metro and UniCredit. At first, that was painful: momentum drove defensive growth stocks higher. But eventually these companies began to fall short of investors' elevated hopes. Our too-cheap-to-ignore' stocks became the new leaders of the nascent bull market in European stocks.
But after a strong run, some of these stocks now trade at a premium to the wider market. Unless growth in Europe picks up, investors risk over-paying. So the pendulum is swinging back towards high-quality, global stocks.
Which provide the best opportunities today? One we like is Swiss-listed Novartis (Zurich: NOVN), the drug giant. Until his departure earlier this year, Daniel Vasella had led the company for two decades, with a strategy of focused diversification'. This might also be translated as wasting shareholders' money on expensive acquisitions'. Not any longer.
The company has a new chief executive and a new chairman, both of whom seem interested in being good stewards of shareholders' funds. The company's potential is commensurate with its underperformance under its previous management.
Non-core or sub-scale activities could be divested and the stake in Roche sold. While they await reform, Novartis shareholders are being paid a near-4% dividend yield.
At the other end of the market-cap spectrum, Axis Communication (Stockholm: AXIS) is a Swedish stock that is still run by its founder and largest shareholder (an arrangement we have always liked).
Axis is a leader in digital surveillance cameras and benefits from the transition from analogue to digital equipment. The company has grown sales by more than 20% a year for the last seven years and keeps introducing new products.
Strong growth plus high operating leverage and a return on equity of over 50% more than justify the multiple (24 times 2013 earnings) that investors are paying.
Our final pick is Switzerland's Partners Group (Zurich: PGHN). This alternative asset manager offers investors access to private markets. It is a big beneficiary of the banks' withdrawal from areas such as mezzanine finance, infrastructure and real-estate markets.
Earnings could be volatile in the short term but beyond that this is a highly attractive investment with the potential to deliver double-digit earnings growth.
