Many European industries are under pressure to consolidate. Even major corporations face downward pre...
The deregulation of Germany's power industry, for example, is producing major shifts. Wholesale electricity prices have fallen by around half since they were liberalised a year ago. Some industrial users have obtained price discounts of up to 60%. France's power industry, Electricité de France, has won the necessary approvals to buy a 25% stake in Germany's Energie Baden-Wurttemberg.
Corporate activity in Europe has contributed to the weakness of the euro. The net flow of capital across the Atlantic has been westwards as European corporations seek to strengthen their commercial positions by acquiring US companies. A recent example is the $1.4bn purchase of Air Express International, the largest freight forwarder in the US, by Deutsche Post.
Many of the largest corporations are making enormous changes to ensure they can survive in a deflationary and highly competitive environment. For some companies, the current conditions represent an opportunity, many of which are medium-sized growth stocks.
A clear trend in Europe and elsewhere is the outsourcing of key service and supply contracts. A major corporation can gain a cost-effective solution through engaging an external specialist. This also allows management and financial resources to be increasingly focused on the core business.
Particular specialty retailers sensitive to European consumers' awareness of price and value should also do well. One example, Charles Voegele, is able to undercut its competition because it operates out of low cost sites on the edge of towns. Kamps, Europe's largest chain of bakery outlets, has aggressively grown its business through acquisition, enabling it to pass on benefits of economies of scale to its customers.
Another group of companies that should prosper are those that can exploit European households' growing demand for non-essential services. Demand for media/entertainment products, travel and tourism is expanding rapidly and more people are eating out or watching movies at the cinema.
Companies with strong positions in these areas are well positioned for future growth. EMTV, one of Europe's largest distributors of TV rights for cartoons, is a good example. Kinowelt Medien and Infogrames, Germany's largest distributors of movies and developers of computer games, are others.
Ryanair has emerged as a leading discount fare airline. It has kept a lid on its costs by various means, such as operating out of secondary airports with low landing fees. Through passing the benefits of the cost savings onto passengers, it has been able to develop a substantial network.
As the success of the recent initial public offering of Terra Networks has shown, investors are excited about the potential of the internet. As more people use cellular phones as a link to the internet, the bonanza will continue for suppliers of handsets, hardware, components and infrastructure. Many European companies will be major beneficiaries of these developments.
Press headlines are likely to be dominated by massive corporate deals for some time. Many of the blue chip companies involved continue to face difficult operating conditions.
We will generally be underweight these stocks, if we hold them at all. Instead, we will focus on the companies with strong positions rapidly-growing areas.
Rory Powe is head of pan-European equities at INVESCO Asset Management
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