European equities will continue to outperform their US counterparts for the rest of the year, according to Threadneedle.
William Davies, head of European equities at the investment management firm, says quickening economic growth, spurred on by strong domestic and export demand, will help investors see strong returns.
Davies also pinpoints Germany as the key to economic success in Europe in the near future, saying the nations “exceptional” performance in the first half of 2007 looks set to continue.
“European equity markets were in favour with asset managers during the first half of 2007, and this is likely to remain the case throughout the remainder of the year,” he says.
“Domestic demand in the region is rising, thanks to quickening economic growth in core countries, such as Germany, and export demand is also firm.
“European equities continue to trade at a discount to their US counterparts and therefore have further scope to rerate.
“Ongoing merger and acquisition activity is also likely to continue to support markets in the region.”
Davies says Germany has been a particular strong performer in the first six months of the year.
“German equities in particular performed exceptionally well this year, returning around 20%,” he says.
“Indeed, the DAX Index outperformed all of its major peers in the eurozone, boosted by the strong returns of index heavyweights including DaimlerChrysler, Siemens and Bayer.”
Davies also scoffs at suggestions rising interest rates across Europe are a bad sign for investors.
“It has been well documented that interest rates in the eurozone are on an upward trajectory,” he said.
“The European Central Bank has already increased the cost of borrowing twice this year, to 4%, and most commentators expect monetary policy to be tightened further.
“But, crucially, interest rates are going up for good reason, i.e. strong growth. The good news is that inflation seems to be under control.”
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