Among the developed markets, Europe is currently the most significant overweight in our global portf...
Among the developed markets, Europe is currently the most significant overweight in our global portfolio, so our view is that, at least in relative terms, that the region's bull case outweighs its negatives.
We see currency as a positive for the region on anything but a very short-term view. Strong forex trends often end up leaving trade fundamentals trailing in their wake as they take on a life of their own.
At some point, it is clear the euro will rally. Unfortunately, forecasting the timing of a major forex turning point is difficult.
A lot of the euro's problems reflect the enthusiasm of European investors for a stake in the high-growth, high-productivity US economy, in particular its technology sector. It seems increasingly clear that the US economy is slowing more quickly than eurozone activity, so, at some stage, the US growth rate will be overhauled by European GDP growth.
We are currently forecasting 2001 GDP growth of 2.5% for the US and 3.2% for Europe ex-UK. This surpasso, when it comes, might be the attention-grabber that stimulates both a euro revival and increased demand for the region's equities. In the meantime, Europe's export sector can continue to enjoy the benefit of a highly competitive exchange rate.
A longer-term support for European markets should come from tax and labour market reforms. In both France and Spain, negotiations are under way that could result in their labour markets becoming significantly more flexible.
Perceptions are important in investment, and the European Central Bank has done little to endear itself to the international investment community.
A lack of reliable pan-European data, weak leadership, secrecy, over-frequent meetings of an unwieldy Governing Council and an over-ambitious inflation target have all contributed to the euro's plight. We suspect, however, that most of these defects will seem less critical once the fundamentals assert themselves and the currency begins to rebound.
Given our views, our European portfolios aren't too defensively positioned. Utilities, healthcare and consumer staples are underweighted, while industrials, IT hardware and consumer cyclicals tend to be prominent. Recent weeks have seen us moving overweight in financials, where we see the improving interest rate environment, a corollary of the weakening outlook for global growth, offsetting the revenue impact of slowdown.
The pressure for financial industry consolidation remains strong and is a background positive. Our heaviest European underweight is the telecom sector, where progress will be limited by the struggle to digest the enormous cost of third generation mobile licences and the increasing uncertainty about their potential for revenue.
Aziz Minhas is global portfolio manager at Old Mutual
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