By Liz Feinstein, European fund manager at Friends Ivory & Sime Although Continental Europe has b...
By Liz Feinstein, European fund manager at Friends Ivory & Sime
Although Continental Europe has been adversely affected by the US-led global slowdown, European countries are about half a year behind the US in terms of their position in the economic cycle. While the Federal Reserve quickly adopted an aggressive monetary easing stance, the European Central Bank (ECB) lagged behind.
European exports were the first to suffer the effects of the recessions in the US, Japan and parts of East Asia.
In contrast, domestic demand initially proved more resilient, although it has begun to weaken more recently. We expect Continental European economies to continue to slow over the next six months.
Weaker economic growth will inevitably depress European earnings, which are forecast to decline by around 20%. However, stock markets act as a leading indicator of the economy and are already discounting the recovery in 2002/3.
Even in the current environment, particular companies will be able to sustain superior earnings growth. At present, for example, the pharmaceuticals sector demonstrates strong growth prospects. We are currently overweight Sanofi and Aventis, both of which have strong revenue growth and relatively limited competition from generic drugs.
Within the telecommunications industry, which has been fairly volatile over the past 18 months, some mobile operators are experiencing an improvement in business momentum as revenues per customer recover. By contrast, earnings of incumbent operators such as Deutsche Telecom continue to be constrained by high debt levels and value-destructive acquisitions.
In the technology sector, there is still some risk earnings will disappoint as many of the companies in the IT hardware sector are reliant on a resumption in investment spending by European telecom operators, which we believe will be delayed.
We expect to see two key developments early in 2002. One is the arrival of the euro in physical form. This will probably not have a major impact on Continental European stock markets but it may give the currency greater credibility within the global context.
Second, in the medium term, we expect corporate re-structuring to again become an important driver of growth, in spite of the fact it has been overshadowed by the global economic slowdown in 2001.
In recent years, a number of leading Continental European companies have completed significant acquisitions, mainly in the US, as they sought to improve their global competitive position. We expect corporate activity to pick up again this year, helped by the abolition of capital gains tax in Germany.
Difficult economic conditions in Europe have led to a decline in earnings for 2001. However, we expect the economic backdrop to become more positive during the year as economic growth recovers later in the year and inflation remains under control.
The market is already factoring in this recovery and we are focusing on companies that will emerge from the current slowdown with above-average earnings growth, strengthened competitive positions and funding to finance future growth.
Growth opportunities within the market.
Interest rates to lower further.
Ongoing corporate restructuring.
Disappointing corporate earnings.
Slowing domestic demand.
Exports under pressure.
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