Mixed signals given out by Europe's consumers

While the consumer should remain in good shape in Europe, Alex Darwall, European fund manager at Jupiter, says this is nothing to get particularly enthusiastic about.

'You can't get excited about the consumer in Europe, as there is not enough evidence to provide real optimism,' he says.

'We are seeing mixed information. One area where there has been an improvement is bookings in the airline sector. But year to date, the car market has weakened, particularly in Germany.'

Adrian Darley, European fund manager at Gartmore, is more optimistic. He says given that the US consumer has held up well in tough economic conditions, there is little reason to expect the European consumer will fare any worse. One of the main factors that could affect consumer confidence is the numerous press reports of poor equity markets and poor performing investments.

But Darley says that this is less the case in Europe as the individual's equity exposure is very low, having only become interested in stock market investments in the past couple of years.

Meanwhile, employment has been coming down very sharply in Europe for several years and low inflation relative to wage growth also leaves more money in consumers' pockets. Low interest rates are positive in the sense that those in debt are repaying less but those with cash in the bank are not benefiting. This is mitigated to a certain extent by low inflation.

'The introduction of the euro has also been a positive in a number of ways,' says Darley. 'On the one hand, it means that prices across Europe are moving into line more. The auto sector is a good example of this. Five years ago, there was a big differential in the prices of Mercedes, for example, between one market and another. Over the last five years we have seen that differential reduce.

'Now that you have the euro in the pocket it is very easy to see someone compare prices on the internet from one market to another. Prices are pushed down because of competition and that means the euro in every consumer's pocket goes that much further.'

Darley's preferred stocks include Autogrill, the number one motorway and airport café operator, which is quite exposed to consumer spending.

Another is Indetex, a Spanish clothing retailer that owns the Zara brand. It has been very successful in the Iberian Peninsula and is expanding into the rest of Europe and abroad.

'They are showing considerable rates of growth even at a time when the consumer is quite depressed,' he says. 'If the consumer picks up, we would therefore expect to see earnings growth surprise at Indetex and we believe the valuation is still attractive.'

In the Jupiter portfolio, one of the main consumer stocks is L'Oreal. Darwall says people still want to buy L'Oreal products and the figures are good.

'Funnily enough, when leisure and travel and holidays go down, people tend to spend more money on pampering,' he says. 'So the fact they did very well in the fourth quarter is not a particular surprise.' Another favourite stock is Nestle, although this is more about the cost cutting opportunities rather than top line drivers. He also likes Medion, which is continuing to grow market share in a difficult consumer electronics market.

Jenne Mannion

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