The benefits of the undervalued euro to European exporters is expected to be shortlived as some fund...
The benefits of the undervalued euro to European exporters is expected to be shortlived as some fund managers believe the currency has turned the corner.
Andrew Killean, investment manager for European equities at Britannic Asset Management, says: "Our view on the currency is quite bullish. We think it is oversold at the moment and will see a significant bounce.
"Our overseas team are talking about the euro achieving a level against the dollar of about 120 which means we are talking about an upside of around 20%. It could happen over the next 18 months."
Killean believes that exports will not get much benefit from the euro going forward and that European cyclicals are nearing the end of their current cycle with steel, paper, autos and similar exporting sectors not attractive on current market valuations.
Brintannic is positioned to take advantage of its belief that euro bloc exports will continue to perform poorly. It is running an overweight position on financials at the expense of cyclicals.
Jeremy Podger, a fund manager at Investec Guinness Flight, agrees there could be a large bounce against the dollar, however he says the impact can only be understood on a stock by stock, sector by sector basis.
Podger says: "Our view is that the euro has turned the corner and is likely to be on a steadily strengthening path. We think that it could rise to 105 to 110 against the dollar in the next 12 months from today's position of just over 95."
He says the factors contributing to the predicted rise are the slowdown in the US economy, the beginning of interest rate rises in the EU, the flow of direct foreign investment turning from the US towards the UK, and the euro finally finding favour with the financial markets. He says: "Clearly the stronger euro will tend to impact on exports out of Europe. The reverse is also true in that if the euro is still substantially below its current level against other world currencies 18 months then that stands the exporters in good stead."
Newton's head of strategy, Tim Wilson, does believe the euro will remain weak in the short term. He says this will give a competitive edge to exporters competing against Japanese and American companies. Despite the recent lows in the euro, export-related sectors like luxury goods, clothing, basic materials, chemical companies, and pharmaceuticals have not performed well.
Wilson says this is largely due to the emphasis that investors are currently putting on the tech sectors. Wilson believes structural problems such as the introduction of new members to the euro bloc will keep the euro's value weak, although he acknowledges that a rise of around 5% is likely.
He says: "For the euro to strengthen by more than 10% there really must be problems elsewhere. It will only appreciate in that way by default with problems in the US and Japan."
Despite Newton's optimistic view for the European exporters who have direct US or Japanese competition, Wilson says the defence companies, clothing manufacturers, chemical companies, computer hardware producers, and Europe's other exporters have yet to be fairly priced by the market.
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