The early part of the summer has witnessed two significant events within the EU. The first is in G...
The early part of the summer has witnessed two significant events within the EU. The first is in Germany. Chancellor Schroeder has brought forward cuts in personal taxation, scheduled for 2005, into 2004, and announced moves to cut government spending as well as plans to deregulate the labour market.
The second is in France, where president Chirac has won his first battle in carrying out his dual election promises of reducing tax and reforming the generous public sector pensions entitlement.
For two decades, we have watched these two great economies become increasingly burdened by the costs of state but now things are changing. An economic zone bound together by a single currency forces countries to behave more like companies to ensure they thrive in a competitive world.
Contrast this with the actions of our own government, which is looking more and more like 'old Europe' every day.
So what does this mean to investors? It is a change that provides the best investment opportunities and in Europe there is massive change and therefore many opportunities. As a stock picker, I am looking for companies that will be the winners and to avoid the losers. Over the next few years, there will be plenty of each.
The bear market of the past few years followed by the sharp recovery during the past four months has meant value is moving around the market, between sectors and, significantly, at a stock level.
Within this period, I have sold previously large holdings in the Bank of Ireland, a defensive stock that has performed well over the past three years but ran out of earnings momentum, and replaced this with Deutsche Bank, which is cheap and which will benefit from any global economic up swing.
I held Acciona for some time as a defensive play in the construction sector but have replaced this with Lafarge, a much more aggressive play on recovery.
Elsewhere, having been cautious on car manufacturers, I have taken positions in Volkswagen and Fiat. The share prices of both have suffered excessively during the bear market and, with restructuring and new model launches due over the coming months, earnings can recover sharply.
I continue to avoid the technology sector as I cannot see that companies can achieve the grossly inflated earnings needed to justify the current high prices.
The mood of the market is getting more optimistic and this is echoed in the broader corporate world, where the IFO business climate index has recorded another rise.
The current rally has broadened to include cyclical services and consumer goods but for the market to really take on a bull feel, we need to see that companies are backing this confidence with cash, replacing ageing plant and investing for growth. Third-quarter results will be key in determining whether we are moving into the next stage.
This remains a stock picker's market in which, to be successful, you need to quickly assess the newsflow and its impact on stock prices.
Monetary policy is supportive.
Cashflows have troughed in cyclicals.
Effective cost cutting is boosting earnings.
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