The current stock market climate is difficult for any active fund manager with a longer-term horizon...
The current stock market climate is difficult for any active fund manager with a longer-term horizon, according to Felix Lanters, head of European equities at ABN Amro Asset Management.
'The deflation of the technology, media and telecom bubble, coinciding with a global economic downturn, has blurred many investors' views on the structural outlook for Europe,' he says.
Year to 31 August, the FTSE Eurotop 300 Index was down 16.57% in euro terms.
James Anderson, manager of the Deutsche European Growth Trust says that although April was a positive month for European markets, gains were wiped out in June as a fresh bout of earnings warnings were announced and sentiment rapidly deteriorated.
'Unlike in the first quarter when some defensive sectors underpinned the markets and posted strong gains, there was a lack of any outstanding performers throughout June,' he says. 'This merely underlined the general air of aimlessness and lack of conviction in the market.'
Anderson believes certain areas in Europe are looking worse than others ' in Germany for example, the likely growth rate for this year will be below 1.5%. The German government expects growth in exports to slow to 8.5% this year from 13% in 2000. Germany accounts for a third of all goods and services produced in the dozen countries using the euro ' and the effects of such a slowdown are therefore likely to have a major impact on the continent as a whole, he adds.
However, despite the current profitability problems, Lanters says that there is growing evidence of some stabilisation of earnings and a bottoming out of earnings revisions.
'In addition to this, the likelihood of more aggressive monetary easing by the ECB will bring more sense of direction on the macroeconomic side,' he says.
Even more compelling, according to Lanters, is the structural outlook for Europe. 'Even in an environment of prolonged moderate economic growth there are reasons to be cheerful on European equities,' he says. 'Trade barriers in Europe are fading fast, partly as the result of the euro being introduced in real life just a few months from now. In general, transparency is increasing so that companies are beginning to encounter more open competition, leading to higher efficiency demands. Gradually increasing flexibility in labour markets will enable European companies to improve their cost structure and enjoy at least some of the benefits of what is left of the new economy.'
Another positive element for European financial markets is pension reform, involving the forced abandoning of pay-as-you-go systems in most countries.
Vast amounts of longer-term orientated money will seek its way into predominantly European markets.
'Both the efficiency element and pension reform are negative factors for overall GDP growth, but do on balance have positive effects on profitability and stock markets,' adds Lanters. 'This leads to an environment that is positive for European stock markets, with better profit growth than GDP suggests.'
• Pension reform in Europe.
• Increasing flexibility in labour markets.
• Bottoming out of earnings revisions.
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