The modern European story is a fascinating one for investors. It will span the next 20 years and we ...
The modern European story is a fascinating one for investors. It will span the next 20 years and we are currently only beginning the second chapter.
Chapter one saw the first steps towards monetary convergence, with the Maastricht treaty, followed by the introduction of the single currency in January this year. Alongside this, industrial restructuring took on a different dimension, with an increased pressure to compete internationally.
For equity investors in particular it was an exciting time. As companies modernised, many realised that they had to go to the equity markets to raise the capital to fulfil their plans.
Equity investors also became more plentiful as they realised that the investment to provide for an ageing population would be delivered more readily through equities than through bonds.
Euroland arrived on a wave of near euphoria. The equity markets overheated last summer, then dived into a 30% correction. In spite of the fact that they regained most of their value, the shock was enough for them to lose their attraction, particularly as the Far East was recovering and the Japanese domestic economy was making a truly dramatic turnaround.
This opportunity to pause and take stock was a good thing, particularly as the corporate and economic fundamentals have continued to improve and valuations have returned to a more attractive range. I am sure that Europe's one step back will be followed by two steps forward.
These will be driven by the continuing erosion of generous social welfare programmes and the fact that industrial and economic restructuring are far from over. Large-scale consolidation is taking on a new dimension, notably in the insurance and banking sectors, to the extent that each country is seeing a few large scale, powerful national champions emerge. It will not be long before this goes much further and cross border alliances are forged amongst the largest organisations.
This level of industrial restructuring is also reason to be optimistic about our economies for the future. The more lean, efficient and fleet-footed commerce becomes, the more able the micro-economies will be to weather any macro-economic problems.
As an example of how much Europe has changed, oil prices have doubled in 1999 but European economies have been strong and efficient enough to absorb them, without generating retail price inflation. By comparison, when there were steep oil price rises in the 70s and 80s, the inflation they inspired was dramatic.
At present, there are renewed concerns about a possible return of inflation and a consequent rise in interest rates. We believe that these are exaggerated and that the growth in competition will mitigate against price rises.
Dino Fuschillo is director of European Equities at SG Asset Management
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