In terms of European company results dates, it has been fairly quiet lately. First-quarter results a...
In terms of European company results dates, it has been fairly quiet lately. First-quarter results are behind us and it will be some time before we know how companies have fared in the second quarter. Usually, this is a time for stock markets to set aside any immediate worries over current business conditions and to focus upon the possibility of a more promising future.
But the old adage of no news being good news is certainly not tempting investors back at present. Institutions appear happy to remain on the sidelines, leading to low stock market turnover and high volatility across the region as a whole.
On a two-year view, the grounds for optimism appear solid. History has shown us that economic cycles typically span approximately five years, which would mean that European economic recovery should begin to pick up in the second half of 2002 and accelerate throughout 2003 and 2004. Some would also argue that recent strength in the euro may also serve to stifle growth by reducing exports. At current levels versus the dollar, European businessmen argue there is little reason to worry. Another 10% appreciation, they argue, would be more problematic leading to a downturn in export volumes as a whole.
But is such a level of euro appreciation really a possibility during the next year? In my opinion, there would have to be such a significant improvement in productivity levels across Europe for this level of currency appreciation to materialise.
While productivity looks set to appear across the European corporate sector during the next few years, it is unlikely to be sufficiently strong to lead to the level of euro currency strength mooted above.
The much-heralded shift to a more shareholder friendly corporate Europe failed to materialise in the late nineties. The web of non-productive cross shareholdings within financial and industrial sectors has remained as intricate as ever.
Yet, the initiative by the German government ' the abolition of capital gains tax on the sale of corporate holdings effective from the beginning of this year ' should at least provide the tools for dismantling Germany's outmoded corporate structure.
However, the catalyst for real change is more likely to be Germany's current poor economic performance relative to its European partners. In my view, this is likely to result in heightened corporate activity during the next few years. Whether such a trend will lead to changes in corporate culture elsewhere in Europe remains to be seen.
Meanwhile, in Italy, the current crisis surrounding the Fiat Group is also likely to intensify pressure for a simplification of the corporate structure of Italian industry as a whole.
Therefore, it would appear that a gradual recovery in European economic activity, a small further appreciation in the euro and expected improvements in levels of European productivity are likely to continue to create attractive investment opportunities across European stock markets as a whole. But what about the immediate prospects for the bourses?
At this point in time, European investors appear to be focused as much upon political factors as economic in determining whether or not to buy European equities. Other external factors at play centre upon the ability of corporate US to withstand another Enron type scandal. While volumes remain low, such factors are likely to lead to further volatility throughout the summer.
European economic recovery on track.
Productivity improvements to come.
Euro appreciation attracting investment.
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Economy to thrive despite global risks
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