The bull case for Europe has been well documented over recent months and most European markets now s...
The bull case for Europe has been well documented over recent months and most European markets now stand at a significant premium to the UK.
The European economy is currently expanding at around 3.5%pa, which should translate into earnings growth of about 10-14% over the course of the year. So with excess capacity in the economy, the potential for Europe to experience a 'goldilocks scenario' is real.
The key question going forward is how the European Central Bank (ECB) manages interest rate policy and the level of the euro in the world's currency markets. So far, the interest rate policy has been cautious and the recent rise reflects concerns over the overheating US economy and internal money supply growth within the EU.
As US economic growth continues to power ahead there is some debate as to whether the new paradigm is now coming to an end. Many economists fear that the Federal Reserve is now 'behind the curve' in terms of interest rate policy and that rates could continue to rise longer than expected to dampen down US consumer expenditure. The fear is that with unemployment below the critical 4% mark, labour shortages may mean that wage inflation now starts to appear.
In Euroland, while there remains a lot of spare industrial capacity, the ECB has taken heed of the money supply figures along with increasing commodity prices and moved rates up to 4%.
Inflation forecasts have been increasing within the G7 and the fear is a persistently weak euro may cause economic problems further down the line. Presently inflation is declining from a peak of 2.1% in March and consensus estimates suggest inflation of 1.5% by the year end and a peak of 6% in interest rates.
While the euro still remains an embarrassment to the ECB, the prospects now appear to look brighter than for some time.
If, as appears likely, EU economic growth continues on a rising trend and US economic growth starts to fall, the euro should start to fare better against the dollar.
In terms of strategy, we have taken advantage of recent weakness in the telecoms sector to increase our weightings in Nokia, Ericsson, Siemens and Alcatel.
Alcatel has received less attention as it has been focused on the less fashionable telecommunications equipment market and has a more chequered recent history. However, the recent first quarter results met expectations and highlighted the company's attractions.
The fund has recently invested in OTE, the leading Greek mobile operator. With Greece expected to join the euro early 2001, this should give a boost to both Greek bonds and equities for both fundamental and technical factors. Not only will bond yields converge with the rest of Europe, Greece will form part of the European Stock Index.
Richard Neill is Chief Investment Officer at Johnson Fry
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