The disappointing performance of the euro since its introduction and its unpredictability has made...
The disappointing performance of the euro since its introduction and its unpredictability has made it difficult to select stocks across a number of interest-sensitive sectors in Euroland.
The euro, which has hovered in the 0.80s since its introduction, hit a high of 0.9566 in January but then moved downwards once again, hitting 0.87 on 17 April.
After the promising surge early this year and forecasts that the euro would continue to flourish, the new currency has failed to exploit US economic difficulties and has returned to its weak position against the dollar. Opinion varies as to what has caused the continuing poor performance but there is agreement that a lack of confidence dogs the currency. Fiona Stokes, investment manager in the European equity team at Britannic, says: "There was an expectation that the euro would do better and it's surprising it hasn't considering recent US weakness."
However, there are several sectors, especially exporters, in which the low euro value has been a boost. It has also been to the benefit of European companies, which have purchased US companies as the dollar income from those investments in the euro environment has been a boost to sales figures.
Olaf Siedler, head of continental European equities at Schroders, says: "There were very aggressive purchases of US companies in 1999 and 2000, £400bn is invested in the US by European companies, the equivalent of 10% of the value of the European market."
He gives the example of the pharmaceutical sector where 32% of sales are in the US against a 21% average. He also points out that sales from the US increased from 16% to 21% from 1997 to 1999 so a strong dollar has boosted revenue.
The dollar's strength versus the euro has made net exporters in Euroland a safer bet, according to Schroders. Siedler says the group's broadly optimistic prognosis of the market has led to a 'pro-cyclical, anti-defensive' approach to stock selection. He says: "The market will continue treading water for the next few months then I think the situation will get better."
Britannic's strategy differs from that of Schroders in that the company is targeting more defensive stocks. Stokes says: "Defensive stocks have outperformed as they are not tied to the economy. Oil and gas have performed better than expected, the strength of the dollar helps these sectors as the world market in oil is in dollars."
Stokes picks out Lafarge with 25% non-European sales as a good performer in the construction and building area.
Similarly, Stokes mentions companies that have a high sales exposure to the US as being strong performers. The brewer Heineken increased in value by 20% in the year ending April 2001 against a drop of 13% for the Bloomberg 500 index.
The fact that auto stocks did not fall as much as expected with the decline in the US economy is seen as positive but Schroders' European funds are now underweight as a drop in demand is forecast to lead to overcapacity.
From the start of the year to March the Bloomberg European Autos index has risen 12.21% in euro, however, from mid March to 17 April the sector has fallen 2.78% compared to a fall of 0.84% in the Bloomberg European 500 index.
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