Economic reports are suggesting the European economy has finally stabilised and, with the global bac...
Economic reports are suggesting the European economy has finally stabilised and, with the global backdrop strengthening, consensus is that the prospects for a European recovery during 2004 have improved.
One such report is the Reuters Purchasing Managers' Index, a survey of eurozone manufacturing activity, which rose in August, suggesting the region's economy has stabilised following recent declines in growth.
On the back of hopes for stronger economic growth, financial companies in particular have been making gains, especially in Germany, where HVB and Deutsche Bank both announced improved prospects for 2004.
Despite the outlook for next year, chief investment officer at Invesco Perpetual Bob Yerbury says the current economic environment remains weak, reflected by the news in August that the eurozone's three largest economies, Germany, France and Italy, all contracted during the second quarter of this year.
However, Yerbury notes, some of the forward-looking indicators were better, with the IFO Index of West German business confidence climbing for the fourth consecutive month, while the Belgian Business Climate index also continued to improve.
He says: 'Investors reacted positively as the euro fell through the $1.10 level, offering some respite to the beleaguered manufacturing industry as well as to eurozone exporters in general.'
In terms of sectoral returns, Yerbury notes that cyclical areas were boosted by the expectation of an economic pickup, with higher-beta and technology-related stocks registering particularly strong gains.
Peter Kysel, acting chief investment officer at Govett Investments, feels the continued economic recovery in the US has yet to fully feed through to the European economy.
He sees the immediate economic indicators as generally bleak, with Germany in recession, and negative GDP growth in Holland, France and Switzerland in the second quarter this year.
However, as a result of improving fortunes in the US, Kysel does anticipate a cyclical upturn in Europe and he remains confident about the US, as after the last difficult three years, he says the tendency has been to underestimate recovery.
John Hatherly, head of global analysis at M&G Investments, is also bullish as things stand, pointing to subsequent improvements that have supported the stock market since France, Germany, Italy and Holland all contracted during the second quarter.
Low interest rates, a pickup in industrial output in Germany and a stabilisation of the euro, which in the last three months has weakened against the dollar, have all been factors behind these improvements, according to Hatherly.
He says: 'The European stock market follows the trend in the US as many of the companies have a large exposure to both North America and China. Due to its global nature, it got oversold in March. Unlike the economy which tells you what has happened, the stock market is a forward-looking indicator, and with the US doing well today it suggests Europe should do well going forward.'
Since hitting a low of 680 in mid March, the Eurotop 300 has rallied to over 900 as at 9 September.
European economy seems to have stabilised.
Improving earnings forecasts for next year.
Cyclical upturn expected.
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