Europe looks set to remain in the doldrums at least until the end of the year. However, some improve...
Europe looks set to remain in the doldrums at least until the end of the year. However, some improvements have been made in the technology sector.
James Anderson, manager of the Deutsche European Growth Trust at Deutsche Asset Management, says: 'Although April was positive, gains were wiped out in June as a fresh bout of earnings warnings were announced and sentiment rapidly deteriorated.'
For example, Nokia plunged 20% following a revenue warning. Anderson explains this has also caused fears that other companies will produce similar warnings.
Anderson says: 'Unlike Q1 when some defensive sectors underpinned the markets and posted strong gains, through June there was a lack of any outstanding performers. This merely underlined the general air of aimlessness and lack of conviction.'
He explains that although he believes the markets will finish the year higher, he expects them to drift sideways over the summer and not to see any meaningful upside before Q4.
Deutsche Asset Management aims to find the companies that will emerge the strongest. Anderson says: 'We expect those that aren't best in class to be fairly pedestrian and we are looking to increase our positions in the key companies that will perform particularly well. For example, TÃ©lÃ©fonica in telecoms and Nokia in technology.'
However, John Hatherly, head of global analysis at M&G, has a different view. He says the European markets are reflecting global trends.
Europe has picked up slightly because of recovery in the technology sector. Hatherly says technology is starting to improve because value is starting to emerge, news flows are starting to get better and companies are in a much more stable position. However, Hatherly says markets have still been weak and investors are waiting for company results for the third quarter.
In certain areas in Europe some countries are slowing down more than others. For example, in Germany the likely growth rate is below 1.5%. In France as well the economy is slowing down.
The German government expects growth in exports to slow to 8.5% this year, from a growth of 13% in 2000. Germany accounts for a third of all goods and services produced in the dozen countries using the euro. In France, industrial production fell approximately by 0.2% in June.
The ECB is taking a more cautious approach to cutting interest rates than the Fed. Inflation is still high in Europe because of high oil prices and a weaker euro.
Sectors Hatherly favours are the defensive areas such as food and beverages. Investors are turning to these areas because they are less sensitive to economic change.
fund manager comment: ABN AMRO
The current stock market climate is difficult for any active, fundamental fund manager with a longer-term horizon. The deflation of the TMT bubble, coinciding with a global economic downturn, has blurred many investors' views on the structural outlook for Europe. Despite the current profitability problems we are beginning to see some stabilisation of earnings and a bottoming-out of earnings revisions.
In addition to this, the likelihood of more aggressive monetary easing by the ECB will bring more sense of direction on the macro-economic side. Timing, of course, remains the major issue. The anticipation of an earlier recovery in the US does not really help Europe to look particularly attractive.
However, more compelling than the cyclical side, in our view, is the structural outlook for Europe. Even in an environment of prolonged moderate economic growth there are reasons to be cheerful on European equities. Trade barriers in Europe are fading fast, partly as the result of the euro being introduced in real life only five months from now. The gradually increasing flexibility in labour markets enables European companies more than ever before to improve their cost structure .
A maybe less fundamental, but powerful positive element for European financial markets is the pension system reform, the forced abandoning of pay-as-you-go systems in most countries. Vast amounts of longer-term orientated money will seek its way into predominantly European markets.
Felix Lanters is head of European Equities at ABN AMRO Asset Management
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