Five arrow's chief investment officer says buy european equities now because euroland economies are recovering and US dollar is sliding
David Kibble, chief executive investment officer at Five Arrows, believes the weakening US dollar to be a boon for European equities.
Kiddie regards further falls in the US currency as part of a strong case for investing in European equities. The falls in Europe's stock markets since March 2000 have reduced a £100 investment to just £60 but now look overdone, especially as Europe's economies are recovering and, compared to bonds, shares are historically good value, he said.
'Equities outperform when profits grow,' Kiddie told delegates at Investment Week's market forum recently. 'And profits will continue to grow this year and the next. New orders are increasing in the big European economies and this is starting to feed through to profits.
There are still questions about how sustainable the recovery could be, according to Kiddie, but the US is recovering, and interest rates remain low. 'Industrial confidence in Germany is picking up. Germany's purchasing index, an indicator of business confidence, has recorded its third month in a row over 50 a sign that modest expansion is underway. Confidence and profits are also improving in France,' he said.
'In the 90s boom investors began to expect 20% earnings growth per annum forever and that drove shares upwards. That thinking has been proved to be flawed but investors now have gone to the other extreme and seem to be waiting for the end of the world and pricing in zero growth for the next few years. There is a huge gap between profits and where they are heading and the level of stock markets.'
The relationship between shares and bonds also points to European shares being good value, said Kiddie. Problems with WorldCom and Enron have overshadowed the fact that the global economy is fundamentally sound and that profits growth could rise to double-digit growth levels.
The relationship between bonds and share prices has swung too heavily towards bonds, said Kiddie, and to get parity again either bond yields must rise by that amount, which is unlikely in a low inflation environment, earnings fall by 40% which is also unlikely or the stock market must rise by 40%. P/E ratios are now back to late 1980s and early 1990s levels. Real dividend yields of 1.5% give further support but the biggest kicker, said Kiddie, could be if the euro rises against the US dollar.
A weak dollar is usually seen as bad for European companies as exports suffer and profits get hit. But according to Kiddie going back over the past two decades there is a close relationship between the strength of the European currencies and the performance of Europe's stock markets. If the dollar is strong they do badly and if the dollar is weak they do well. So if the dollar does fall it makes an interesting story for European shares especially compared to US stock markets.
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