Fund of the week: markets are heading for a fall

It'd be easy to get carried away in the European equity rally, with stocks up 30% since March. But Crispin Longden is sceptical. His fund, the F&C European Assets Trust (LSE: EAT), has returned 31.4% since March, after big gains for TiGenix, a Belgian-based biotech stock, and Irish software group Norkom. But he's more cautious than ever about the rally 15% of the mid-cap focused fund is now in cash, waiting for a pull-back that may, says the St Andrews-educated fund manager, come sooner rather than later.

The current rally has been led by the same sectors that powered the market to its earlier highs, only to fall back because they were too pricey. Second, it has occurred on very low trading volumes, "often associated with a temporary blip in a longer bear market rather than a genuine recovery." After rallying 39%, small caps are factoring in a "sharper and more rapid improvement in profitability and balance-sheet health than the current economic conditions or immediate outlook warrant".

Infected by optimism, analysts are revising profit estimates for 2010. In the 2001 slump, "arguably far less severe than the current one," says Longden, operating margins fell well below 10%. Yet "2010 forecasts suggest operating margins north of 13%, while industrial production in Europe is still falling by an unprecedented double-digit annual percentage".

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So get ready for markets to fall back again. Longden is underweight in financials, but may increase this if prices fall as he expects. He's recently added firms in the business services sectors, such as Irish distributor DCC and Dutch temporary employment company Randstad. The fund trades at a discount to net asset value of around 9%. Call 0845-7992299 to make enquiries.

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F&C European Assets Trust top ten holdings