After three tough years for the European economy, Axa Investment Managers is confident the trend has...
After three tough years for the European economy, Axa Investment Managers is confident the trend has now been reversed.
It says business conditions have shown significant improvement not only in Germany but throughout the euro area, driven by the rebound in investment.
The group also predicts the internal components of euro area activity will firm up in 2006, as both household and corporate spending gain speed. Gross domestic product (GDP) is expected to progress by 2.1% and will become more balanced as internal demand also rises by an estimated 2%.
Laurence Chieze-Devivier, a strategist at Axa Investment Managers, comments: "Overall, 2004 and 2005 were years of corporate debt restructuring with, in the course of 2005, an increase in M&A activity.
"This year is expected to be the year in which investment rebounds, boosted by further earnings growth and relatively low interest rates.
"Current economic conditions, coupled with one-off measures, should lend support to the domestic demand recovery, which is currently underway in the eurozone. First of all, robust global growth and corporate earnings will stimulate capex spending, which is expected to increase by more than 3.5% this year.
"Household spending will also be supported by a stronger labour market - enabling a reduction in the savings rate - and vibrant real estate markets and one-off measures, notably in Germany.
"Under these circumstances, the outlook for 2006 is encouraging and suggests more balanced growth ahead. In 2007, the situation could be less buoyant, in particular due to fiscal adjustments in the works."
Outside the eurozone, the emerging markets Europe region, as measured by the S&P IFCI index, has also seen periods of sharp profit-taking. Over 2005, the index climbed some 50%.
Three-quarters of S&P-rated funds in Central and Eastern Europe peer group achieved better returns than the 37% gain registered by the median fund in the sector.
However, two top-performing S&P-rated funds - the A-rated Baring Emerging Europe investment trust and the A-rated Baring Eastern European fund - both recorded above average returns.
Mike Hockings, fund analyst at S&P, says: "The main ingredients for success were a high exposure to Russia and a healthy stake in Turkey."
He explains that many of the leading funds also held maximum positions in the Russian oil and energy giants, Lukoil, Surgutneftgaz and Gazprom, as well as strong representation in other energy-related investments in the region, such as PKN, MOL and CEZ.
An example of a pragmatic and effective fund strategy was Merrill Lynch's AA-rated Emerging Europe fund, he says, which gained second quartile ranking, boosted by the decision of the joint managers to double the fund's Russian exposure to more than 50% of the portfolio in June and July, last year. The fund also gained from a high exposure to Turkey.
Looking at the prospects for the emerging markets Europe sectors, Hockings says very few fund managers were comprehensively bullish on the region.
"Most were optimistic on Russia, the largest geographical exposure of most portfolios," he says, "but Central European markets were less favoured.
"Several fund managers see the benefits of convergence gradually spilling out to include such countries as Croatia, Romania, Bulgaria, Ukraine and even Georgia, while some talk of potentially interesting IPOs in the Middle East."
Eurozone economy on the rebound
Household spending to be supported by a stronger labour market
European emerging markets sees periods of sharp profit-taking
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