Eurozone economies and equity markets have been dominated by two themes: the performance of the euro...
Eurozone economies and equity markets have been dominated by two themes: the performance of the euro against most major currencies and the rise and fall of the technology, media and telecom sectors.
The euro was unusually weak during 2000 and slipped below parity with the dollar in April. However, the ECB responded and raised interest rates from 2.5% to 4.75%. Early rises were directed at curtailing strong economic growth in the eurozone, while later increases were aimed at supporting the euro. More recently, with increasing worries over the US slowdown, the euro has found a base and appears to be showing some support at its current level.
The bubble in European technology, media and telecoms stocks in 2000 was a phenomenon common to all key markets, as valuations became unrealistically high. However, in Europe these sectors suffered less of a correction than their US counterparts.
Our portfolio currently has a pro-cyclical bias because of the relative strength of the eurozone economy, with significant positions in sectors such as construction, building materials, retailers, leisure, media and transport. We have been adding to these areas as we perceive the risk of further corporate earnings downgrades to be lower than average.
Consumer confidence within the eurozone remains robust, supported by tax cuts in a number of countries. With this in mind, we have positions within the retail sector with companies such as Vendex and Galeries Lafayette. In other areas, the media-related sector has been very depressed on the back of concerns about economic growth and advertising spend.
However, we feel this has been overdone and we have exposure to companies with more defendable growth prospects such as Spain's Grupo Prisa.
GDP growth forecasts for the eurozone have not collapsed, despite falling economic indicators. The rate of growth may have fallen from its peak during 2000, but we are still looking at a figure in excess of 2.5% for the full calendar year 2000, which is reasonable by European standards.
The market anticipates that the ECB will follow the lead set by other central banks and cut interest rates given the steadier outlook for the European and the US economies. In addition, the euro has strengthened more convincingly than for some time, which will reduce any remaining concerns that the ECB may still have on inflation.
Although leading economic indicators have yet to bottom out, we are relatively optimistic about the outlook for the eurozone economies. Early in 2001, many countries are due to receive a substantial boost from tax cuts.
Valuations in some areas are now looking more interesting than they have for some time. The investing environment is likely to be one in which stockpicking will be the key determinant of performance.
Jeff Taylor is head of European Investment at Perpetual
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