By Chris Tracey, investment director The performance of the Europe ex UK Index in 2001 was dis...
By Chris Tracey, investment director
The performance of the Europe ex UK Index in 2001 was disappointing, particularly relative to the US. In the earlier part of the year disappointment that the European Central Bank was not pre-emptive in its interest rate policy was clearly a factor in Europe's underperformance, but latterly that has not been the case. Instead, concerns have turned to the rapid slowdown in the euro-zone economy.
The quoted sector is more manufacturing-orientated than its US or UK counterparts, so to that extent the underperformance is understandable. There is the possibility of further cuts in interest rates from the present 3.25%, although the ECB President was recently quoted as saying that current rates were 'appropriate'.
But, even if the European recovery lags, the chances are that European equities will discount a manufacturing upturn as it becomes visible in the US. European cyclicals have the added advantage of much cheaper valuations than their US counterparts, while the European corporate and personal sector is much less borrowed than in the US, so the risk to the recovery of a sharp rise in savings is largely absent.
Finally, the euro's physical introduction may well attract more widespread publicity outside Europe. Therefore, a surprise for 2002 might be that the euro is no longer overshadowed by its US counterpart. We remain slightly overweight European equities in our global portfolios.
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