Across the Continent, corporate activity is pronounced. Export orders and indicators of business con...
Across the Continent, corporate activity is pronounced. Export orders and indicators of business confidence confirm an economic recovery. Relative to the UK, we prefer the rising tide of restructuring in Europe and yet are underweight. Why
It is a purely relative call. We are bullish on Japan, and want to move more money into emerging markets early next year. We had to find the cash from somewhere. So we have cut our European exposure, booking profits, to leave our weighting 18% in a global portfolio against 22% for the MSCI. But the region's attractions remain clear
First, in the macro-environment, improving global growth has brightened the outlook for European GDP. We expect a rise to 2.7% or so into next year. Inflation is not an issue. The heady mix of deregulation, higher unemployment, and price conversions on the introduction of the euro is squashing prices. The big picture is good, even given upward pressure on interest rates. Growth in corporate earnings of 12% is possible for 2000
Moreover, Europe is cheap. It is trading at a P/E relative of 0.76 to the US market well below its 20-year average of 0.95. Some say this valuation gap is due only to differences in the sector mix. But that accounts for only a third of the gap. Differences in valuations explain two-thirds. Even after adjusting for the sector mix factor, European equities are trading at an 18% P/E discount to US equities against a historical mean of 5
But the real case for the region is at corporate level. Corporate restructuring had slowed, but is rallying, in two forms. In the first wave, national champions are emerging, like the merger of French banks Paribas and BNP, or the done deal between BCH and Santander in Spain. The French supermarket giants Carrefour and Promodes are to merge, and that puts greater pressure on others to follow
The trend is broadening into a second wave of the transnational. Take Nordic banks. Last year, a Finnish and a Swedish bank surprised the market by merging as MeritaNordbanken. Now the new bank has bid for Norway's Christiania Bank and refuses to obey the Queensberry rules, despite opposition from the Norwegian government
Despite backward steps like the recent skulduggery by Telecom Italia's majority shareholder, the trend will lead to even more big mergers. Several sectors, especially mobile telephony, already ignore national borders and reap the rewards. Only a few years ago Germany's Mannesmann, for example, was a dozy industrial. Today, it is a world class telecoms company with a strong European business, which may yet include Orange
So the question for a global portfolio is not whether to be in Europe, rather what degree to be so. But beware trouble ahead. Of 164 economists polled recently, 106 backed the UK joining the single currency. Gordon Brown, you have been warned
Stewart Higgins is head of Europe at Martin Currie Investment Management
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