Last year featured a surge in international interest in Europe as investors began to realise how man...
Last year featured a surge in international interest in Europe as investors began to realise how many world class technology stocks can be found there, particularly in Scandinavia, Germany, France, Italy and Spain.
The economic recovery is also a new story, and forecasts for this year are comparable with the UK and the US. The pace of corporate amalgamation, too, has developed well in Europe and the influence of international shareholders has been a catalyst.
Apart from improving economic fundamentals, pressure on management to maximise shareholder value is now becoming more intense as illustrated by the recent hostile take-over of Mannesmann by Vodafone. The interests of top management are now more closely allied with shareholders.
The euro is forcing companies to become more competitive. Major reforms are taking place in the form of restructuring and rationalisations. This will have the beneficial effect of increasing earnings, leading to higher share prices. Top management will be looking to make their companies more profitable. They will want to buy out competitors, increasing the scope of their operations while at the same time eliminating competitors.
Investors across the Continent have to deal with even lower interest rates than we do. Investors are turning to shares. This, in turn, will force the pace of industrial consolidation which is already at record levels. Furthermore, European governments are also under pressure to compete for international capital as witnessed by the recent German tax cut proposals. All these developments bode well for the shareholder.
We believe that inflation is likely to remain at modest levels, despite stronger economic growth. It would also appear that bond markets have already largely discounted inflationary fears. Furthermore, should inflationary pressure continue to be a concern, the European Central Bank could make use of pre-emptive interest rate rises. Valuations in certain technology stocks do appear to be excessive and an element of caution now needs to be applied when looking at this sector.
The old problems remain, however. Politicians are finding their domestic political support unsympathetic to the sort of reform programme the financial community would like, and the new European Central Bank has yet to put its weight behind the experiment with growth which has driven the US economy. But the prospect for European equity performance remains encouraging, despite these macro concerns, as corporate profitability has considerable upside as the integration of Europe proceeds.
An unhealthy focus on a very narrow number of stocks - telecoms, media and technology - can lead to artificially high share prices. In addition, there is a real need to be cautious about those dot.com stocks which are being brought to the market, but which do not have any real business plans. Finally, the strong economies of Europe will need keeping in check by the central bank as inflationary pressures could emerge in the future.
Richard Pease is fund manager at Jupiter
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