The overall climate for equity markets is looking benign. Continued global growth without much infl...
The overall climate for equity markets is looking benign. Continued global growth without much inflationary pressure is our core scenario for the rest of 2000.
Any risk of further interest rate increases appears to be discounted already in the bond markets. The second quarter repricing of long duration stocks (or stocks whose price demanded the greatest number of years' sustained earnings growth) has turned to a more normal focus on unrecognised growth and value characteristics.
At the same time the European macro environment is looking positive. Across Europe unemployment is falling while consumption and investment growth is firm. This is likely to lead to a situation of slower growth and declining inflation despite European concern about the oil price. This in turn should reduce the need for any further European Central Bank (ECB) interest rate increases.
But the micro situation is better. First half 2000 earnings results were strong, with 54% of companies beating expectations and only 16% disappointing. IBES earnings expectations for 2001 relative to 2000 were raised to 13% growth. Actual results are likely to outperform expectations against the backdrop of strong domestic demand.
Of course there are still some question marks, both macro and micro. Bureaucracy in Europe will probably compare unfavourably with that of the US for some time to come. Progress on issues where EU legislation is required (e.g. pension reform) has been very slow.
No-one should underestimate the direction of corporate tax reform in Germany or new legislation on stock options in France. Nor should the advantages of political buy-in to such reform be underestimated. Progress may look slow, but it is substantial.
The same is true of social welfare and unemployment. The costs of the former have traditionally caused the high levels of the latter. However, European unemployment is falling now in countries like France, and dramatically elsewhere. Unemployment in the Netherlands has fallen from 8.4% to 3.0% of the population over the last decade, adding 1% to GDP growth over the European average (or 2.9%). There are more gains of this kind to be had.
On the micro side, mid 2000 saw the revival of interest in large cap European defensive stocks, ignored during the technology wave of September 1999 - March 2000. In general, as pensions move from the state to individuals, and savings into funds increases, so too does the funding for new companies.
Our core scenario is built on the assumption that this benign macro environment will continue for the rest of this year and into 2001. While there will be high tech companies which disappoint or crash (like Boo.com) or have management issues (World Online), Europe's entrepreneurial spirit is here to stay and more success stories than failures will emerge.
Neil Robson is head of European equities at Baring Asset Management
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