It is now quite clear that we are entering a phase of global growth slowdown, but Europe looks bette...
It is now quite clear that we are entering a phase of global growth slowdown, but Europe looks better placed than the US, both in economic and stock market terms.
Europe simply has not suffered from the economic excesses of the US. The business cycle in the US was alive and well, it is just that we didn't see it. The capital expenditure drive in technology became, by this time last year, divorced from the idea of returns on investment. Sure enough, this boom is now unravelling into bust.
In continental Europe the long period of economic expansion from the early 1990s has coincided with a move to greater, not less, capital discipline in traditional industries. This is the reason why traditionally more cyclical areas of the continental markets are now coming back to life. Investors have started to realise that shares in steel markets, chemical companies, auto assemblers and engineers can be picked up at valuation levels that are lower than the cycle average in previous economic cycles while industry structure and profit discipline are arguably more favourable for investors than at any time in the past thirty years.
But to couch the recent change in the market simply as new economy bad, old economy good is far too simplistic. While Nokia, Alcatel and France Telecom have all lost 30% or more of their stock market value so far this year, a handful of second-line software and computer service groups are jostling with auto and building companies at the top of the league table. There is another powerful force at work. The whole story of European fund managers from Italy to Ireland since the tail end of 1998 has been about shifting attention away from their local stock markets and moving across the eurozone. Now, prompted by the bursting of the technology bubble, these eurozone investors are growing up fast and looking for new opportunities in second-line stocks and markets that have been left behind over the past two years.
This year the Euro Stoxx 50 Index has just started sharply underperforming broader Eurozone indices. And while the main markets are down by the best part of 10% year to date, peripheral markets are up. Indices showing positive returns in the year to 5 March include Austria, Denmark, Ireland, Norway and Spain and, equally strikingly, the same goes for the German and Dutch mid-cap indices.
In today's uncertain environment, where can we safely hope to make good returns?
There are a number of very interesting areas made all the more compelling by suddenly finding themselves in the limelight. Virtually all European real estate companies represent good value and should continue their recent strong run. There are also a number of attractively valued second-line pharmaceutical companies in Europe which are just beginning to get their message across to mainstream investors.
Jeremy Podger is a European fund manager at Investec
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