European equity markets might still have to endure a volatile summer, but in contrast to other globa...
European equity markets might still have to endure a volatile summer, but in contrast to other global equity markets, the region is enjoying its most positive outlook for some time.
The euro, which finally rallied in May after a 17-month slide, is still a concern. European economies, in contrast to the US or UK, are more sensitive to currency levels than to interest rates because they have more fixed rate mortgages and lower levels of personal debt.
Although a weak euro supported Europe's climb out of recession earlier this year, too rapid an appreciation now would risk plunging the region back into economic stagnation. Germany, particularly, needs further economic growth to consolidate gains made so far. The ideal scenario would be rising economic growth and a steadily appreciating euro.
European equity markets are still taking their lead from Wall Street, but in contrast to the US and UK, European technology stocks rebounded quickly from their falls in March and April.
Despite continuing volatility in the sector, and the confusion of launched and pulled IPOs, investors are re-discovering their appetite for these new economy growth stocks.
The weak currency, supported by the accelerated pace of corporate restructuring has fuelled a spate of merger and acquisition activity which is not over yet.
Corporate reforms introduced in recent months are also starting to bear fruit.
The new reporting season should produce significant earnings upgrades, which may well contrast favourably with more disappointing numbers coming from US companies.
Recent announcements on corporate tax reform in Germany have been a big positive for both the local and eurozone markets. Other European markets are expected to follow with France already announcing a package of income tax relief.
Inflation figures for the eurozone suggest that the European Central Bank's unusually sharp interest rate rise in June was a timely counter to signs of overheating in some economies. The inflation data is not a key concern, although the currency markets have already discounted further interest rate rises.
Europe's deepening equity markets, both in terms of investor base and companies listed, continue to provide an attractive environment for investors. Resurgent growth has attracted new players, often with considerable leverage, who are more active buyers and sellers.
In this kind of market we prefer to hold more stable growth stocks, and domestically orientated, economically sensitive companies in the retailing and media sectors.
Although Europe has some world-beating tech companies, and the sector is generally cheaper than the UK, we believe valuations for many telecommunications stocks are still over-optimistic. To justify current levels, some will need to produce earnings growth at a very demanding rate for the foreseeable future.
Margaret Roddan is joint head of European Investment at Perpetual
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