There are mixed feelings among fund managers as to whether the UK will continue to outperform contin...
There are mixed feelings among fund managers as to whether the UK will continue to outperform continental Europe or whether it is time for a turnaround.
Although Europe has been restructuring, the UK still has some room for growth but for both areas a slowdown in consumer spending could pose a threat for the economies.
Max King, investment strategist at Investec Asset Management, explains the main drivers behind the pan-European market are the strategies companies are adopting to raise returns on capital.
King feels Europe offers the best opportunities. He says: "European companies have been restructuring and outsourcing parts of businesses to Eastern Europe. Europe is not really as bad as people think. Competition from Eastern Europe is also pushing down corporate tax rates across Europe and countries have been reducing regulation to improve competitiveness across businesses."
According to Jeremy Lodwick, chief investment officer at Framlington, rising house prices in the Eurozone are providing a wealth cushion for consumers and there has been a sizeable build-up in both the household and corporate sectors.
Lodwick says: "We are anticipating moderate, export-led growth in 2005. Risks are accumulating from currency strength and high energy prices but an economic bust is unlikely. Restructuring has taken hold and the corporate sector is moving ahead of the proposed reform agendas of both national governments and the European Commission."
However, according to Stewart Robertson, UK and European economist at Morley Fund Management, the latest surveys for Europe all point to a slowdown. He warns Europe is going to disappoint and favours the UK instead. This is because he feels there is more scope for growth in the UK than Europe as demand is stronger.
Robertson explains: "Domestic demand in Europe has not picked up much as consumers are worried about the future and so are saving instead of spending. Previously, exports drove the growth and provided the catalyst for economic improvement in Europe. But, the appreciation of the euro and higher oil prices has hit the competitiveness of exports and they are having a poorer time."
Robertson is concerned about Italy and feels the economy has turned gloomy. Companies in Italy have not embarked on restructuring like businesses in Germany and France. It is unlikely Prime Minister Berlusconi is to push through reform processes necessary to help restructure the country with an election looming in May.
Robertson feels house builders will be the long-term story for the UK. There has been a shortage of houses especially in southern England in the past 10-20 years. King also favours house builders in the UK as valuations have been discounted in fear of a crash. But, this has not happened and prices are stabilising.
If rates do rise, Robertson points out, house prices will only slow down, but there will be no big falls. He believes one more rate rise will be sufficient to help stabilise the market.
Lodwick agrees and says: "The decision facing the Bank of England regarding interest rates is finely balanced. Recent tightening has had the desired effect of cooling down the housing market. We would expect any further adjustments to interest rates to be gradual and not overly destabilising to the market."
According to Robertson, people have been concerned that recent development in the housing market could turn into something worse. However, it has not collapsed. House prices are stabilising and have been revising gently. People have been too pessimistic about the UK and are concerned about whether or not the Bank of England will raise interest rates.
King feels an important factor for the UK economy will be the May election. The UK economy is increasingly funded from the public sector through tax rates rather than from participation by the private sector. This could be the downfall for the UK. Robertson agrees and points out that, given current fiscal trends, taxes will have to rise and public spending constraints are unlikely. If consumer incomes are hit through tax hikes, this may cause the consumer slowdown to become more evident.
There are concerns that consumers spending in both the UK and Europe will take a further hit if oil prices continue to rise.
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