Although the economic situation in Euroland remains poor, valuations in the equity markets look attr...
Although the economic situation in Euroland remains poor, valuations in the equity markets look attractive. Slow economic growth is forcing companies to restructure, which in the longer term will prove helpful.
Research from Credit Suisse Asset Management (CSAM) shows that revisions in Europe's growth expectations for 2005 have signalled some countries are getting closer to recessionary levels. However, European equities have attractive valuations relative to global equities.
Philipp Vorndran, country head of CSAM Germany, says: "All our asset allocation groups like European equities and are consequently overweight them. They have underperformed US equities and we believe that there is some catch up potential relative to US equities."
Calvin Vaudin, investment manager at Ashburton, says: "We are still quite pessimistic about European growth. Economic statistics show that the economic environment continues to slow and the ECB has had to hold rates."
Nonetheless, Vaudin feels stocks that that are linked to growth globally can do well. He favours luxury goods firms in France as they have strong export growth in the US, and he likes industrial stocks because of exports to the Far East.
In Germany, Vaudin has been focusing on the exporting sectors such as steels and pharmaceuticals because of demand from the Far East.
Other fund managers have similar views. Richard Batley, European economist at Schroders, says: "Investing in Europe seems a complete paradox. Corporate Europe has done well, even if GDP has not. Structural reforms, restricted domestic demand and wage growth look bad from a consumer point of view. But they have been good for businesses."
Batley bemoans the 'sick man of Europe' label given to Germany at the moment, saying it is not the case. The country is reforming, however painfully, and that will leave it in better shape economically. Even though unemployment recently peaked at 5.2 million - 12% of the workforce - the reforms made by Chancellor Gerhard Schröder, although unpopular, are beginning to take effect.
For example, corporate Germany has been using the threat of cheap manufacturing in Eastern Europe to beat down wages, making Germany more competitive against France and Italy.
There have been European funds that have performed exceptionally well over the past few years. The Fidelity European Growth is best over three years with a return of 32.40% and the Odey Continental European is best over five years with a return of 48.72%.
However, some managers warn that France's vote on the EU constitution could have an impact on markets. There is one school of thought that the 'No' vote has left the EU in crisis.
Gary Clarke, manager of Garmore's European Focus Fund, does not expect major repercussions for European equities. He points out while this would undoubtedly be a setback for European integration and plans for further enlargement, it would result in the continuation of the status quo, which is no cause for alarm.
Europe would carry on functioning under the current framework as established in the Treaty of Nice, which has been in place since February 2003. There should not be any long-term effects on the euro, as the articles covering the single currency and monetary union are contained in that treaty, which will remain in force.
Clarke says: "Peripheral markets such as Hungary and Greece may feel the impact more than the major European exchanges but most of our funds, including the Gartmore European Focus fund, have very limited exposure to these areas. There could also be a Europe-wide risk premium increase, affecting bonds and equities but when faced with uncertainty regarding the outcome of an event, the market sometimes prices in the worst case scenario, which we believe is currently the case.
"There may be limited stock-specific effects on groups that are heavily geared to Eastern European convergence and expansion, or businesses that rely on Eastern European consumers. But there is no reason why the growing number of companies such as tyre maker Continental and white goods manufacturer Indesit, which have taken advantage of lower Easter European labour costs, should not continue to enjoy the benefits of having moved their production facilities and perform well for investors."
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