European stock markets experienced extreme volatility during the second half of 2001 but have been b...
European stock markets experienced extreme volatility during the second half of 2001 but have been buoyed by news that French consumer spending during December was double that expected.
The level of volatility is indicated by the performance of the Bloomberg 500 index, which fell 13.01% in euro terms over the course of the past year but rose 13.02% from the end of September to the end of December.
Alia Beg, manager of Axa's European Opportunities fund, believes the French consumer spending figures are not as surprising as some analysts have made out.
Beg says: 'Consumption in Europe has been pretty healthy recently and tends to be more resilient in the face of economic dips than the Anglo-Saxon economies. This is because there is less pressure on the consumer in terms of job security and the fact that European countries tend to have a higher savings ratio. This means there is less incentive to save when interest rates go down, encouraging people to spend more.'
Beg sees the stock market volatility experienced towards the end of last year as a blip and a repercussion of the events of 11 September. She interprets the increase in consumer spending in December as indicating a return to a more normal cycle.
John Hatherly, head of global analysis at M&G, thinks many of the conditions for long-term growth in the European equity market are now in place.
He says: 'European companies have traditionally been run in a less efficient manner than those in the UK or US. During the 1990s, partly driven by increased foreign participation in European markets, many companies began moving towards more Anglo-Saxon corporate structures. This meant paying more attention to the creation of shareholder value and increasing the use of stock markets to raise capital.'
Most European countries have now embarked on a programme of pension reform and are encouraging their citizens to save for their own retirement. Over the next few years, this should mean a huge increase in the amount of assets invested in equity markets.
Hatherly says: 'Taking a 10-year view, these positive changes will almost certainly continue. The flexibility of European labour markets will undoubtedly help increase the rate of GDP growth going forward. The caveat is that Europe, because it has such a long way to go, will not enjoy as strong growth rates as some other parts of the world.'
While Baring's head of European equities, Jan Mantel, believes many of the key fundamentals that will drive growth are in place, he feels other areas of the world may outperform Europe.
Mantel agrees with Hatherly that pension reform and increased flexibility in labour markets are significant plusses and points out that the introduction of the euro has made European products more competitive. But, at the same time, he feels social pressures may hold back the pace of development.
'Europe is moving forward and making itself more competitive,' he says, 'but quite often governments are taking two steps forward and one back. Governments in Europe don't like the excesses of the free market and often try interfere with it. This tendency will result in a lower rate of growth but a less cyclical economy.'
Equity markets have stabilised after volatility.
Pension reform will increase equity demand.
Labour markets becoming more flexible.
Europe lags US and UK in attitude to markets.
Government interference may slow growth.
Not all euro countries will adhere to rules.
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