By Shamik Dhar, European strategist at Morley Fund Management The short-term outlook for Europe ...
By Shamik Dhar, European strategist at Morley Fund Management
The short-term outlook for Europe highlights the recovery in global industry, which should mean a recovery in demand for European exports and an expected recovery of investment in the second half of 2002.
Europe has not experienced the over-investment the US has, so it has more room for expansion as the economy is running under its potential capacity. Unlike the UK, European consumption fell last year due to rising inflation but, as inflation currently poses little threat, consumerism should flourish. The effect of this could be strong, as Europe, unlike the UK, is not already overly dependent on the consumer.
There are longer-term trends we can identify to anticipate better performance from European equities this year. With a low growth and low-inflation environment, companies endeavour to maintain profits through increased merger activity and acquisitions. Further long-term trends within the European economy include an increase in participation rates; and as the European Labour market has suffered from rigidity through poor demographics, this is a positive progression to strong employment growth.
We also see the impending pension fund reform in Europe as an opportunity. While this issue has been discussed many times before, it looks as if some progress is finally being made. Most eurozone countries will soon find that the terms of the growth and stability pact will force them to take a less active role in direct pension provision. The consequences for European equities are positive, as the stage will be set for the expansion of personal pensions and their forms of private saving within the eurozone. Particularly at a time of low inflation and low growth, investors may look for an increased return over their low- risk government bonds. So we expect to see an increase in the demand for equities ' especially from institutions ' contributing to the European mutual fund market development.
While these themes all offer reasons to invest in Europe, investors still face the problem of how to profit from the long-term opportunities that exist across the region. In our view, the heavy falls seen in European markets over the past two years means that there are now a number of good opportunities at the stock level to pick up companies with attractive growth and/or restructuring stories. In particular within the airline industry, where we see the stronger airlines taking greater market share once passenger numbers return to their previous levels.
We are also positive on stocks that offer the benefits of restructuring a trend that is already ongoing within the basic industries sector. The long-suffering technology sector also looks attractive as these stocks look relatively cheap and, with economic recovery anticipated in the second half of this year, some of the companies in the sector could be well placed to benefit from the increased investor confidence.
The European economy may have to wait for a US recovery to come through but the importance of this market cannot be underestimated, with twice the market capitalisation of the UK and Japan and good long-term growth prospects this may prove to be a good year for Europe.
Transparent prices across eurozone.
Consumer spending to make an impact.
Recession looks to have bottomed out.
Inflation is at a low level.
Germany and Italy in recession.
Evidence that labour market is rigid.
Record numbers of people aged 90 plus
From 3 to 10 October
'Integral part' of the financial planning process for many advisers
Proposals outlined at Labour Party conference