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Last September, Feras Al-Chalabi, manager of the £318m CF Odey Continental European fund, faced difficult questions about his results against his competitive Europe ex UK peer group. On a cumulative 10-year basis, the fund was the highest-performing in the sector, but in three of the previous 10 quarters it had underperformed.

Nine months later, Mr Al-Chalabi is top of his peer group for the year to 26 May and top decile over three. Mr Al-Chalabi says he does not chase over-valued momentum stocks, which explains why his performance was less impressive during the latter stages of the bull market. Instead, he sticks with emerging stories that tend to be most potent at the initial and middle stages of a bull run – and at tougher times like the present.

“We look for stocks in their winter that are starting to enter their spring and summer,” he says. But these stories have not given up their secrets to Mr Al-Chalabi without a struggle. “When liquidity contracts, only one thing goes up, and that’s correlation.”

One of these secrets has been the hidden after-effects of the earthquake in financials. “Our realisation in mid-June was that the credit markets had turned and the benevolent environment had come to an end," he says. "The portfolio maintained a very defensive bias between then and mid-March this year.”

Over the course of June and July, no fewer than 11 companies dropped out of Mr Al-Chalabi’s top-10 holdings alone, but few of these companies were financially orientated. In fact, on 31 August, Trustnet data indicated that Zurich Financial Services, Royal & SunAlliance Insurance and Munich Re had become the top-three holdings.

But by the end of October, these stocks had dropped out of the top 10 and more defensive stocks such as German utilities RWE and E.ON had entered it. Mr Al-Chalabi observes these companies have considerable pricing power due to the sheer cost of creating new supply in Germany.

Another favourite top-10 play between the end of August and the end of December was telecoms, most notably mobile companies Telefónica, Vodafone and Nokia. “It became clear people had forgotten about mobile growth,” Mr Al-Chalabi says.

Mr Al-Chalabi’s defensiveness did not rule him out of the growth story in resources. By 30 September, diversified takeover target Xstrata had temporarily become the top holding, although by the end of January, he preferred soaring gold bullion securities. While gold fell off earlier this year, gold dropped out of his top 10. Mr Al-Chalabi replaced his holding with steel majors ArcelorMittal and ThyssenKrupp.

Looking forward, Mr Al-Chalabi sketches out the causes of pricing power in the metals industry. With steel forecast to hit $1000 a ton, he observed one of Odey’s graduate trainees could not even get a quote at a steel depot. But he warns hard commodity demand from emerging markets may not hold up in the current economic climate.

“They are more likely to be just part of a motorway,” he says. “The US housing crisis is the crash site, and currently the emerging markets are driving further down the road. The debate is, how long does that last?”

Unlike certain commentators, Mr Al-Chalabi does not believe the developed world’s financial quandaries are over. “For us, a credit crisis has two clear phases," he says. "Phase one is the liquidity crisis, the need to convert all assets to cash immediately. Where we’ve moved to now is phase two, which is the solvency crisis.”

This has not stopped Mr Al-Chalabi from finding isolated top-10 value in banks such as Société Générale and Allianz in recent months. “For me, the banks debate is a very simple one. Until the Fed stepped in, the banks were uninvestable. From this point onwards, banks are investable, but unattractive. Banking has entered its winter.”

As far as other sectors are concerned, Mr Al-Chalabi is looking for companies that are able to meet their interest payments and deliver the pricing power he has found in resources and utilities. He is also looking for companies with the diversified international coverage that will escape some of the developed world’s current woes.

“I’m broadly avoiding domestic stories because the European consumer will have a very tough time this year,” he says. “Italy is in recession. Spain is fast entering a recession.” Mr Al-Chalabi cites the abrupt shift in Spanish unemployment statistics from 16-year lows to nine-year highs over just a few months.

One of the chief beneficiaries of this international story is leading exporter Germany, which Mr Al-Chalabi thinks has overcome many of its previous economic limitations. “Germany will continue to grow. The reason for this is that Germany has competitively de-inflated. The gap between Italy and Germany has widened dramatically.”

But Germany’s fate as an exporter hinges partly on the fate of the euro, which for exporters is worryingly strong at present. “Europe today is looking an increasingly vulnerable place from a competitiveness point of view," Mr Al-Chalabi says. "The ECB is behind the curve in cutting rates. The euro is at too high a level because the ECB’s mandate is just inflation, not inflation and growth, as it is for the Fed.”

This does not mean Mr Al-Chalabi is pessimistic on European stocks. According to Trustnet, he recently reduced his money market weighting from 33.85 per cent at the end of February to 4.95 per cent by the end of March. In the face of better earnings statistics from the US than from Europe, he returns to a well-worn analysts’ maxim – “The best predictor of European earnings is US earnings with a six-month delay.”

Although some commentators have put this delay at 12 months rather than six, the medium-term implications of this statement are clear. If the US recovers, Europe will too. The crucial question for retail investors is how long such a recovery may last – and how long it can provide Mr Al-Chalabi with bargains.