By Schroders' European equity team While the prospect of a global economic recovery in 2002 is p...
By Schroders' European equity team
While the prospect of a global economic recovery in 2002 is positive for Europe, we expect the region to benefit from other key factors, including the introduction of the euro and the growth of mobile communications.
Coupled with an improving economic environment, these factors should boost the region's prospects, not only in the short term but in the longer-term as well.
Much as the 1990s was undoubtedly America's decade, this will be Europe's.
During the 90s, the US dominated the technology market, with the majority of technology patents coming from the US and large inflows of capital into the country. As investment in technology increased, productivity improved, which in turn lifted profitability.
The symbol of this triumph was the dominance of the dollar. However, dollar strength today masks a fundamental shift that suggests this will be Europe's decade.
A new mobile operating environment is set to emerge that will be dominated by Europe.
In the 1980s, investors became intoxicated by Japan's dominance of the consumer electronics industry, which placed an unprecedented valuation premium on companies such as Sony and Honda. In the 1990s, the personal computer and internet euphoria did the same, leveraging the franchises of Intel, Microsoft and Dell.
While there is exciting consolidation in the US media & entertainment space, this decade will be based on a mobile platform.
The physical introduction of euros in January 2002 marks more than just a symbolic move from a virtual to a real currency. It has resulted in the creation of a genuinely single capital market for equities, an international share currency for companies and the creation of a vibrant corporate bond market.
Yet until January 2002, the lack of physical euros meant the currency effectively remained the deutschmark. Investors priced the euro off disappointing growth dynamics in Germany rather than the reasonably robust developments in France.
Partly as a result of this, only a fraction of foreign exchange reserves are held in euro-denominated currencies, with the majority in dollars.
A 10% shift from dollars to euros would represent 'free funding' of the eurozone's budget deficit in each of the next three years on the basis that foreigners buy euros but never present them back as they remain outside the eurozone.
A similar impact will accrue from the decision of six Eastern European countries to adopt the euro as their official currency. The liquidity and growth implications of the euro achieving genuine reserve currency status should not be underestimated.
Economic growth should ensue if policies are put in place allowing a reduction in solvency levels. Private sector savings as a percentage of disposable income currently stand at 9%. Assuming the correct policies are put in place, there is tremendous potential for GDP growth if savings rates are reduced.
With all these positive measures, economic newsflow should become more positive as the global growth environment improves in 2002, which will lead to better market returns.
Economic newsflow should improve.
Physical introduction of euro will drive growth.
Decade will be Europe's as last was America's.
Euro priced off German economic situation.
Little foreign exchange reserves held in euros.
Lack of rate cutting from ECB.
Growth driven by platform business
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