The outlook remains very positive due to a number of factors including positive earnings growth, str...
The outlook remains very positive due to a number of factors including positive earnings growth, structural reforms and favourable demographics.
While GDP growth is likely to exceed consensus forecasts and could therefore lead to rising interest rates, we believe earnings growth for 2000 will be ahead of expectations and more than offset the negative impact of rising interest rates on equity markets.
Consensus earnings forecasts are predicated on sales growth of 10% for 2000 and 5% for 2001, which are over optimistic. Therefore, it will be crucial to identify companies delivering strong volume growth, a key factor in our investment philosophy.
The areas in particular where we can find such growth are in the telecom and technology sectors, our favoured parts of the market.
The currency is another potential positive for European markets. The continuing weakness of the euro has been a positive growth factor, boosting exports, GDP and earnings growth. However, there is the downside risk of rising inflationary pressures. More importantly in our view, the introduction of the single currency has increased the transparency of prices within the region has promoted competition for capital which has speeded up structural reforms and has forced management to focus on enhancing and maintaining shareholder value.
Structural competition is now encouraging companies to restructure at a faster pace than consensus has anticipated and this trend is likely to accelerate. For example, Siemens, a core holding, has floated both Infineon and Epcos.
Governments are also driving changes. The German government has announced a reduction in corporate taxation including CGT. This will facilitate the break-up of the massive cross-shareholdings that are embedded in Germany's corporate culture, where today, some 12% of the DAX is accounted for by corporate cross-holdings. Indeed overall, the lower tax proposals are likely to add 8% to German earnings in 2001.
But for us, the crucial factor for longer-term earnings growth is whether this capital is then used to maximise shareholder value. In France more generous share buy back rules have been introduced and all the CAC 40 companies have applied for permission to buy back shares.
Current valuations when compared on an historic aggregated basis may appear less supportive for European equities. We remain positive on the outlook for European equity markets. While sector themes will remain important, we expect to see increasing performance dispersion within sectors as stocks demonstrating strong growth, positive business momentum and consistent profits progression are rewarded.
Liz Feinstein is director of pan-European equities at Friends Ivory & Sime
Janus Henderson Global Dividend Index
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Long-term strategic holding
What made financial headlines over the weekend?
To promote 'long-term investment'