Continental European markets are benefiting from a pick-up in economic growth in the core eurozone e...
Continental European markets are benefiting from a pick-up in economic growth in the core eurozone economies, continuing M&A activity, including the grudging acceptance of hostile take-overs, and from a rally in technology stocks.
Most sectors will continue to benefit from this favourable macro-economic environment, but it is technology - the investment theme of the moment - that will most likely outperform. And it is to Europe that the astute investor is looking.
The online revolution will accelerate in 2000. European markets will be at the forefront of this as the huge potential of the internet leads investors to focus on technology and telecoms stocks to an even greater extent. Helped by improved content and easier and cheaper access, internet usage in Europe should grow faster than in its initial phase in the US. European companies facilitating this will drive growth in European stock markets for years to come. For example, in the last few years US tech stocks have grown to more than a quarter of the US market's total capitalisation, while in Europe, they still only account for about 16%.
The key growth factor in the European telecoms sector is the technology revolution. It is behind Vodafone's hostile bid for Mannesmann and will lead to further consolidation as telecoms companies expand and compete to handle the expected increase in internet traffic.
This is especially true now investors are paying attention to clear long-term technological trends. These show European companies at the heart of the new product cycle characterised by 'internet in your pocket' technology (mobile internet access). European companies such as Nokia and Ericsson, and the mobile operators, now lead their US counterparts such as Cisco.
The recent mega-merger of Time Warner and AOL has set a precedent for Europe as well as the US. Internet and media companies will increasingly link up to dominate home entertainment. In Europe the potential for consolidation is immense.
There are short-term risks. The biggest threat would be a major correction in the US, where the tech sector is more mature, and valuations more stretched. Sharp falls in US tech stocks would hit Europe. Also, inflation in eurozone economies such as Ireland and Spain may test the one-size fits all interest rate policy of the ECB. Finally, there are doubts over commitment to free trade after intervention in the recent Vodafone and Philip Holzman cases.
However, we remain positive on the region, and on the tech sector in particular. European tech firms will be key innovators and set global standards. Europe has a long way to go to catch up with the US, but, as the Americans took over the baton of the Industrial Revolution in the 19th century, the Europeans are ideally placed to do so with technology in the 21st Century.
Andrew Spencer is head of European equities at Fleming Asset Management
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