Europe is entering a period of sustained growth and the only risk attached is underestimating the po...
Europe is entering a period of sustained growth and the only risk attached is underestimating the potential rate.
According to Neil Robson, head of the European team at Baring Asset Management, GDP forecasts for Europe in 2000 are 3.5% with earnings growth at 15% but they could actually come in higher, at 4% and 20% respectively.
He said: "Companies are restructuring, which is generating new cashflow. Share buybacks and spin-offs are also increasing in number. This extra cashflow means that management has more options relating to acquisitions and mergers. Share prices will continue to rise as these options are valuable."
Restructuring is a key theme for German companies, which will be allowed to sell off cross-shareholdings with zero capital gains tax. As an example of the benefits, Robson has estimated that if the money raised from such sales was reinvested in core business, Deutsche Bank's share price could be rerated from its current market cap of E52bn to E78bn.
Robson said that the other major factor in Europe was the increase in productivity brought about by technology. Not only is it a fast-growing sector itself, it can also help other industries to transform.
One case in point is the telecoms sector. Two years ago European telecoms companies were regulated and produced a solid but unexciting return on equity and dividend, for which investors paid six times cashflow, Robson said. Now, after deregulation of the industry, companies are able to compete globally, are benefiting from the e-commerce boom, have major capex opportunities and are more expensive for investors, currently on 14 times cashflow. If technology can help telecoms, it can also help heavy industry like old economy car manufacturers. Their problem is managing inventory levels, which are generally kept high.
Robson said: "By using technology, cars could be built to a buyer's specification, perhaps within just three days as information can be transmitted through all parts of the supply chain."
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