The European manufacturing sector is set to benefit from inventory restocking on top of the expected...
The European manufacturing sector is set to benefit from inventory restocking on top of the expected cyclical economic recovery.
Jason James, European equity strategist at HSBC, says manufacturers in Europe will recover soon, driven by the need to restock depleted inventories.
'Last year, final demand collapsed in the US so companies found themselves with excess inventories and aggressively got rid of them through not ordering any new stock,'says James.
In addition to the cyclical recovery, many investors, such as Michel Legros, manager of the Merrill Lynch European Dynamic fund, believe this should drive growth in the sector.
Legros says: 'We have become increasingly confident a cyclical recovery is set to emerge this year and now anticipate a similar level of earnings growth in Europe to that expected in the US.'
Earnings growth across the board in Europe is looking firmer, especially given a benign inflation backdrop.
Legros says: 'Over the past year or so, consensus forecasts have reduced to more realistic levels. We are more confident about the assumptions for earnings growth rates in 2002, given that the low inflation environment is spurring many European companies into potentially earnings-enhancing restructuring and/or consolidation.
'Share valuations in Europe appear attractive relative to the US, with the mismatch most evident in cyclical areas such as industrials and materials.'
The low-inflation backdrop, he adds, should allow interest rates to remain low. 'Inflation in Europe is predicted to fall over the coming months, which leads us to believe interest rates in the eurozone are likely to remain low for the foreseeable future,' he says.
The German IFO survey is the most important manufacturing sector indicator, according to James, and last month, it showed the second-largest rise in expectations since it began in 1963, indicating a growing level of optimism. While the survey shows that current conditions remain weak, it is an indicator that a bottom in manufacturing expectations has been reached. 'Generally, surveys are now giving a turnaround for the positive in Europe. I think that is even true for the UK,'says James.
He believes key factors have been the bottoming out of the US economy and the Fed's aggressive rate cuts, which have helped to keep consumer demand up.
Ian Ormaston, on the European equities desk at Singer & Friedlander, believes the sector will benefit from cyclical recovery.
He is overweight auto manufacturers, as well as traditional manufacturing but underweight tech manufacturing and capital goods stocks. He favours Renault, Peugeot and Volvo, which he sees as cheap.
Peter Kysel, head of European equities at Govett, is marginally underweight the sector as a whole but likes certain areas. He is underweight aerospace companies because their medium-term outlook is weak following 11 September and is underweight building and construction products.
'Europe is lagging behind the US by nine months or so,' says Kysel. He has exposure to manufacturers of electric and energy equipment. His favourite stock in this area is Danish company Vestas, which manufactures turbines for wind farms.
Cyclical upturn expected.
Inflation outlook benign.
Inventories need restocking.
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