Following on from the annual lull in activity as European markets enjoyed their summer holidays ther...
Following on from the annual lull in activity as European markets enjoyed their summer holidays there has been little positive news to act as a catalyst to re-ignite investor's enthusiasm.
Despite a short lived rally in some tech stocks the market remains weary due to the oil price strength exceeding most people's expectations and the euro continuing to reach new lows against the dollar. Consequently we have seen renewed interest in the defensive sectors with financials, oils and pharmaceuticals outperforming.
The worst performing sector over the last six months has been telecommunications. Investors have yet to be convinced of the future returns from third generation data services.
Elsewhere, the increased costs of raw materials and borrowing combined with price deflation have led to a squeeze in margins in some manufacturing areas. Personal computer sales have disappointed as we saw with headline announcements in the US, although this is less of an issue for European technology companies which are far more mobile-centric than PC-centric.
As we are seeing in the world's other major markets, euroland's leading indicators point to a slowing of domestic activity. We forecast that growth levels will, in absolute terms, remain robust in 2001 as fiscal stimulus in the core economies of France and Germany help to bolster activity, while household consumption and capital expenditure remain strong.
The interesting debate in euroland relates to monetary policy, inflation and the currency. The ECB is facing a dilemma, in that growth seems set to slow but headline inflation is still rising, due to oil prices and the weakness of the euro.
The self-imposed inflation ceiling of 2% which the ECB must adhere to, means that policymaking in euroland is less flexible than in some other economies.
The weakness in the euro is providing a significant boost for European exporters, the benefits of which are being seen in recent results. Although the oil price may increase further in the short term, we believe it will ultimately stabilise at lower levels thus removing much of the upward pressure on inflation.
In aggregate the economic background of relatively low inflation, peaking interest rates and slowing but still robust economic demand presents a positive environment for equities.
Going forward we remain very stock selective and continue to focus on those areas that illustrate genuine value or growth potential in the current economic environment.
Longer term, we remain positive on the prospects for increased fund flow due to the growing equity culture and the Pension fund reforms currently sweeping Europe.
Aaron Barnfather is fund manager, European Equities at RSA Investments
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