Fund manager's comment/Jeff Currington
European equities continue to take their lead from their US counterparts and recent levels of volatility remain. Although the expectation is for an improved economic environment toward the end of the year, the cautious stance and wary sentiment is likely to continue over the coming months.
The past year has been a shocker for Euroland equity investors, many of whom may be experiencing a bear market for the first time. Recent events may have scared off Euroland investors more than they should. If they stay out and do not treat recent events as a buying opportunity, as a more experienced investor might, a recovery in Euroland equities may take longer.
Inflationary pressures are expected to remain high in the short to medium term but our forecast going into 2002 is for a lower rate in the region of 1.5%. Having said that, it is our opinion that these forecasts are in line with ECB expectations and that inflation will not stand in the way of the further rate cuts expected in the third and fourth quarters of 2001.
If the US economy pulls out of recession by the beginning of 2002, we may even see a stronger bounce in Euroland equities.
So will Europe continue to grow? Despite the May rate cut, we expect growth to continue to be weak. Recent consumption data has been weaker than expected, while the ongoing weak global outlook is inevitably affecting exports. But investors may be underestimating the resilience of the Euroland domestic economy. An interesting approach to benefit from this resilience would be to invest in medium and smaller sized companies that have less exposure to the US and Asia Pacific through exports.
Another reason for the expected growth in European equities is the pension and tax reform on the cards in Europe.
The strongest argument in favour of fiscal and pension reform succeeding is that there is very little alternative. This is particularly true of pension schemes in Euroland where the liabilities would probably be too great for most Euroland governments to bear if nothing is done. More constructive dialogue with trade unions and other concerned bodies may facilitate what has become one of the most pressing issues on the Continental European economic landscape.
We would advocate outperformance from Euroland equities relative to the US and UK over the coming year and expect European equity markets to consolidate on recent gains.
We remain cautious but open to tactical positions in sectors and stocks we believe will outperform in the current environment. In addition, Euroland consumers do not have a negative savings ratio like US consumers and have the capacity to invest in equities. We do not believe they have been put off as yet and, coupled with top-down reform, the reasons for outperformance are as potent as ever.
ECB may have kept rates too high.
Pension and fiscal reforms.
Recent market volatility.
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