European exporters have seen a weakening in demand at a time when valuations in the sector are exp...
European exporters have seen a weakening in demand at a time when valuations in the sector are expensive compared to their Asian counterparts.
Darrell O'Dea, manager of Threadneedle's £1bn-plus European Select Growth Fund, says European exporters have been hurt by the weakness of the yen against the euro and a slump in demand from the US. O'Dea says: 'It depends which geographical area exporters are competing against. The yen has been weak against the euro and the euro has been weak against the dollar. So if companies are exporting from Europe to Asia their goods look expensive. In addition, while the euro has fallen against the dollar, the US economy is still weak and demand is less.'
Juliet Cohn, a European fund manager at Dresdner RCM, says the recent changeover to euros has resulted in an initial administration expense for some retailers but many firms are benefiting from the single currency.
However, UK, Swedish, Norwegian and Swiss exporters into Europe are perhaps slightly disadvantaged. She says UK companies have costs in sterling and the currency is an additional risk. Many of the large companies hedge against this but the extra administration is an another cost.
Over the long term, she says the euro will ultimately lead to greater transparency in pricing.
Cohn says: 'There has been a greater willingness of European countries to regard Euroland as a domestic market. Furthermore we have had some firms shifting factories from Germany, where labour is more expensive, to Spain. The best example is Volkswagen which recently acquired Spanish car manufacturer Seat. Now Volkswagens are being produced in Spain.'
European strategist at Aegon Asset Management, Peter Lucas, says: 'Being a European exporter is distinctly hard work at the moment. They are struggling because the world's economy is in recession however the leading indicators, such as the Purchaser Management Index, suggest that things seem to be picking up both in Europe and more importantly in the US and Asia. So we think many exporters are looking to pick up.'
Simon Chisholm, manager of Henderson's £70m European Smaller Companies, says: 'I think those expecting better economic data in the second half of this year will be disappointed. But ironically I am optimistic about the equity market. Exporters such as Swedish ball bearings manufacturer SKF are holding up despite fears. The market was predicting disappointing numbers because of the weak yen but their last report was good.'
Chisholm says the old adage that a weak euro was beneficial to exporters has been overshadowed by depressing demand in the US economy.
In terms of sectors, Chisholm favours cyclicals such as office supply companies. He says: 'The deeper cyclicals have already outperformed a little bit.'
Chisholm adds he is taking a bet on certain companies with higher levels of debt. He believes that in the wake of the Enron scandal many companies have been heavily discounted and the market has overcompensated.
He says: 'People are missing the point. Companies that are both operationally geared and financially geared offer the most upside for equity investment. That is if you believe, as I do, there are inefficiencies in the middle and small cap sectors.'
Euro is bringing benefits.
PMI indicating an upturn.
Cyclicals offering opportunities.
US demand for euro exports weak.
Euro strong against the yen.
Valuations look expensive.
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