European markets reached five-year highs towards the end of 2006, buoyed by a round of merger and ac...
European markets reached five-year highs towards the end of 2006, buoyed by a round of merger and acquisition activity and healthy earnings - a trend that is set to continue in the next 12 months, according to Richard Pease, manager of the New Star European Growth fund.
He says: "Takeover activity was particularly strong in Continental Europe in 2006. But, even with rising interest rates within the eurozone, credit is still relatively cheap and corporate activity is likely to remain a defining feature of the European equity markets in 2007."
He points out that the eurozone economy outpaced the US in the third quarter of 2006.
"It is still too early to tell whether it is a blip or a sign of the long-sleeping European picking up the baton from the weary American consumer. Either way, corporate profitability appears robust," says Pease, who remains overweight in industrial and construction-related stocks such as Man, the German truck-maker and Geberit the Swiss plumbing group.
But while M&A deals are likely to remain a positive force for the sector in 2007, weaker economics data towards the end of 2006 has deflated optimism among some commentators.
The figures show that economic growth will slow again in 2007, says Norwich Union economist Stewart Robertson.
He adds: "Eurozone growth slowed in the third quarter of 2006 and weak consumer spending in Germany is likely to be made worse because the country has experienced one of the biggest tax increases ever seen." German VAT increased to 19% on 1 January 2007.
There are unfortunate parallels with the Japanese in 1997 where tax rises condemned Japan to years of economic misery, Robertson warns.
He says: "Inflation is below target but the European Central Bank (ECB) is concerned that it could push higher in early 2007, partly because of the increase in German VAT. Many of the eurozone economies - Germany and Italy in particular - will see their populations shrink significantly in coming years. This will reduce demand and output growth in the future."
In an effort to squeeze inflation, the ECB raised interest rates in December to 3.5%.The bank has continued to warn against the risk posed by inflationary pressures but, so far, higher rates have failed to halt money supply growth or economic expansion.
However, ECB president Jean-Claude Trichet said monetary policy remains accommodative, encouraging speculation that further increases are on the cards for next year.
Roger Guy, manager of Gartmore's European Selected Opportunities and Sicav Continental European funds, says: "Trichet's apparent lack of alarm over the recent strength of the euro suggests he is optimistic that the region's economy can cope with a stronger currency."
The economy is at the beginning of a strong, self-sustaining investment cycle, which will likely be the key driver of growth in 2007, Guy predicts.
He says: "Prospects for strong capital investment look set to continue into next year and, coupled with rising employment levels and a pick up in wage growth, we expect European gross domestic product growth to beat consensus expectations in 2007."
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