Gartmore sees plenty of opportunity in Europe as corporate restructuring and tax reforms alter the m...
Gartmore sees plenty of opportunity in Europe as corporate restructuring and tax reforms alter the markets.
Stephen Jones, the group's head of European equities, admitted many investors might well be cynical as fund managers had promised reform for the past five years but argued benefits are now beginning to come through.
He said: 'Capital gains tax (CGT) in Germany is now at 0%. The Germans are the leaders in tax reform, something that would not have been thought possible a few years ago.'
Jones said many German companies had a core business but had acquired a rag bag of rubbish that could make up as much as 40% of total assets, over the past few decades, when the focus of corporate Germany was on job creation and preservation, not shareholder returns.
With CGT then at 55% he argued many businesses could not have sold off their peripheral concerns even if they had wanted to and in the meantime these other concerns left the business less focused and with a pool of non-performing assets.
Jones added the change on CGT is already beginning to encourage change in Germany, with a focus on higher profits, and should have a knock on effect on tax policies in neighbouring countries. He speculated on what would happen if corporate Germany, with money raised from sale of non-core assets, started to use its wealth to buy up quality French stocks. He suggested it would be only a matter of time before the French went down the same CGT route as the Germans as a means of trying to ensure French businesses were bought up by French concerns.
He then argued that the changes would revitalise the European small-cap sector which he characterised as being mainly a collection of failed large caps although he believes innovation can now come to the market. At present, Gartmore estimates that around 10% of small caps in Europe are growth stocks but within five years that figure could move to 50%.
Gartmore believes the economic outlook for the continent was compelling. He expects inflation to be below 2% by the end of next year, down from 2.4% today, caused by higher food and oil prices, and said that the ECB is unlikely to raise rates until October and then only by 0.25%.
The group is factoring in strong GDP growth from the second half of the year at around 3%, continuing at a similar level for 2003.
Jones cited the IBES Europe ex-UK forecast of 35% growth in earnings and said that while there is growing evidence of improvement, investors will have to expect some downgrades.
Against this he cited BMW, which has underestimated demand for its version of the mini, just launched but has underestimated the number of upgraded coupe versions, which have higher margins on them that consumers wanted.
Within this environment Jones said equities could not be called stunningly cheap but they are looking attractive when valued relative to bonds, with profits-growth underpinned by longer-term structural reform.
He said: 'The market P/E is about 20 times now, which is the same level as it was during 1997 and more attractive than the US, on nearly 30 times. We expect a V-shaped recovery for the economy with a W-shaped recovery for the markets, driven by profits growth.'
Gartmore predicted good news for investors worried about volatility, arguing that there are signs that it has now peaked and is falling back towards a long-term average. He said the advent of hedge funds coupled with the very strict divide between bulls and bears on the market had contributed to market volatility.
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