The European telecom sector is attractive in these times of turbulent equity markets as it is producing better earnings growth than the rest of the market, yet it is trading at a valuation more or less in line with the market, says Vittorio Fegitz, chief investment officer at RBC Asset Management U.K. Ltd.

"It has taken European telecom services companies seven years to repair their balance sheets following their investment/expansion excesses which came to a head in 2000," says Fegitz.

The good news, he says, is that their extensive capital expenditure on third-generation wireless technology is finally starting to pay off, with revenue from data transmission via wireless rising sharply.

Fegitz, based in London, England, co-manages the RBC European Equity Fund and the RBC International Equity Fund. He uses a multi-disciplinary approach to select stocks that includes fundamental, technical and quantitative analysis. The RBC European Equity Fund will be the focus of this column.

This fund is overweight telecom services stocks. These stocks are defensive, he says, "a plus at this stage of the economic cycle." Fegitz also likes some similarly defensive brand-name consumer stocks.

This European fund is modestly overweight the energy sector. Energy companies have strong balance sheets and are benefiting from the high oil price, says Fegitz. "These companies should have stable to rising earnings."

By contrast, the portfolio is underweight the European financial services sector -- "particularly the banks." The sector is suffering from "the credit crunch and asset-backed securities problems."

Of the big economic picture in Europe, Fegitz says while the GDP growth estimate for 2008 is being reduced, it is still expected to be in the 2% range, "which is a relatively good pace for Europe."

Turning to the European equity market, Fegitz notes that earnings growth estimates for companies in the MSCI Europe Index are being reduced.

In the late summer, the estimates called for 12% EPS growth for 2007, 13% for 2008 and 11% for 2009, whereas consensus is currently for EPS growth of 10% for 2007, 11% for 2008 and 11% for 2009.

"While these estimates could be reduced further, they will likely still be in the high single-digit range."

Furthermore, he says, the current valuation on the European equity market is "not excessive." The MSCI Europe Index is trading at 14 times 2008 EPS estimates and 12.4 times 2009 estimates.

"Once the credit concerns subside, there could well be a P/E multiple expansion which would help to offset the expected decline in the EPS growth rate."

From the European telecom sector, Fegitz is highlighting Telefonica SA. Based in Spain, Telefonica provides telecom services to Europe and in Latin America, where it has a large presence. The company is expected to produce EPS growth of 23% in 2008 and 14% in 2009. The stock currently trades around 14.3 times 2008 estimates and 12.5 times 2009 estimates.

Fegitz continues to champion Vodafone Group PLC, the British mobile telecom services provider, which was one of his selections in the Jan. 24 column, when it traded at US$29.52.

"It is one of the largest mobile phone companies in the world," he notes. "It is enjoying high rates of revenue growth from wireless data transmission."

Vodafone represents 4.7% of the RBC European Equity Fund and is Fegitz's second-largest holding.

In the financial services sector, Fegitz sold his holding in the major Dutch bank, ABN Amro Holding NV, pursuant to the successful takeover by a group led by Edinburgh-based Bank of Scotland.

ABN Amro was a significant holding in the portfolio and Fegitz used some of the cash proceeds to buy consumer staples stocks such as Nestle SA. Based in Switzerland, this company is a major global player in the food business.

"It is a solid company and represents a strong, defensive play during this market volatility."

It has a good track record, high return on equity, and a commanding presence in the markets its serves, he says. The stock trades at a P/E multiple of 18 times 2008 EPS estimates, "which is a premium over the market multiple."

- Imperial Tobacco Group PLC. This major British tobacco company is taking over Spanish/French rival Altadis SA, whose products include Gauloises cigarettes.

"There is considerable scope for cost-cutting as a result of this merger," Fegitz says. "This move is part of the ongoing consolidation in the global tobacco industry, which may boost the pricing power of the remaining players."

Imperial Tobacco's stock trades at 15 times 2008 EPS estimates, "which is a slight premium to the market."

Turning to the energy sector, Fegitz is highlighting StatoilHydro AS, which is the result of a recent merger of two Norwegian energy companies --Statoil and Norsk Hydro.

"The merger results in a stronger balance sheet, the potential for cost savings and increased bargaining power for the company in dealing with its international interests."

The merged company has one of the stronger production profiles of its European peers over the medium-term, says Fegitz.

StatoilHydro's EPS is expected to grow by a modest 2% in 2008, he says, "but these estimates do not take into account the higher energy prices."

The stock trades at 10 times 2008 EPS estimates.