The outlook for European equity markets is positive, with recent forecasts indicating a growth rate ...
The outlook for European equity markets is positive, with recent forecasts indicating a growth rate of 2.4%, representing a significant pick-up in economic activity.
James Buckley, manager of the Baring European Growth fund, says: "Improvements in reporting, declining unemployment rates and the additional impetus provided by Eastern Europe are serving as a real boost for investors in developed Europe."
He says Europe is in the early part of a recovery cycle and he expects earnings growth and positive earnings surprises in the second half of 2007. He adds: "Price/earnings ratios are still well below their previous highs in 2000 and pan-European M&A activity continues to grow and be more cash-based."
Nigel Bolton, head of European equities at Scottish Widows Investment Partnership is similarly buoyed up by the recent M&A activity. He points out that there has been €430bn (£295bn) worth of deals, year to date, in Western Europe alone. He is predicting earnings growth for European equities in 2007 to be around 8% and says: "The market will continue to be sustained by large M&A operations, driven in turn by the availability of cash and attractive valuations of companies."
Buckley espouses a bottom-up stock-picking approach as opposed to traditional country investing techniques. "A country or sector's performance is not linked to its index weight. For example, a European index would allocate the highest proportion to France which has only been the 11th best performer in developed Europe," says Buckley.
Buckley, like many others, is underweight French stocks at present, but says the recent election result was positive. "Sarkozy was the preferred victor for market investors but how quickly any transformation takes place and who benefits from that at corporate level remains to be seen," he adds.
In contrast, Buckley is overweight in Greece, particularly in banking stocks, estimating that Greece has a P/E ratio of 13x for 9% EPS growth.
[in Greece] continues to outpace Western Europe. Some of our highest conviction ideas held in our European portfolios have been in Greek stocks."
Bolton has also invested in Norwegian construction stocks. He says: "The continuation of strong order intake appears assured by the Norwegian government's commitment to further develop the country's infrastructure over the next few years."
Renewable energy companies have provided a boost to many portfolios. Standard Life, Barings and Scottish Widows all have shares in Vestas Wind Systems, a Danish company that produces wind turbines for alternative electricity generation.
However, positive outlook aside, Buckley says that the weakness of the US dollar remains an issue. He says: "A US recession would obviously have a significant impact."
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