Europe suffered a setback last year because technology, media and telecom valuations became over str...
Europe suffered a setback last year because technology, media and telecom valuations became over stretched. Several companies managed to get a Neuer Market listing when in reality they should have struggled to get venture capital backing and, unfortunately, many investors lost out as a result.
But there are a number of issues that should give the investor some confidence for 2001 and the long-term outlook is positive.
More investors are participating in the equity markets and increased inflows can only benefit the stock markets. People in countries like Germany are realising their governments will not support them in retirement and so are turning to equities in a bid to generate their own income in retirement.
The potential changes for corporation tax in a number of countries will also prove attractive for many companies. In Germany, corporation tax is due to drop to below 40 % and it is likely that France will follow. Other countries may be forced to follow suit because if they do not drop their tax rates, they will lose out as companies direct their profits to those with low taxes.
Another huge plus point for Europe is that it is also full of companies that are world-leaders. There are several serious winners.
Although the prospects for Europe bode well, there are some obstacles that could slow its progress.
European governments are under pressure to change, which is good news, but many have a history of socialism and are reluctant to embrace the capitalist mentality. This can only hold Europe back. The issue of Europe moving eastwards. The weak single currency has also been an embarrassment so far. It shows Europe has a long way to go and that politicians have to get their act together.
Recent shenanigans from the Anglo-French IT group Sema and media group EMTV have also left investors concerned. The former chairman of Sema sold 1.8m shares worth £24m just days before the company was due to announce its interims in September. This breached rules stating that directors should not deal in company shares two months before the results. Subsequent profit warnings saw its shares immediately lose half their value. Events such as this have sent investors the wrong messages and may have done some short-term damage.
There are opportunities to find individual golden era stories. Europe is a big pond but there are plenty of fish in it to look at. Margins are being squeezed, but in areas such as the mid-cap sector, there are some interesting businesses that are proving they have the ability to defend their niche markets during a time of consolidation and margin pressure, yet still grow at above average rates. I also think there are some exciting stories in Ireland where many stocks are undervalued.
Richard Pease is European fund manager at Jupiter
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