Standard Life Investments is to remain bullish on European equities because of the depreciation of t...
Standard Life Investments is to remain bullish on European equities because of the depreciation of the euro and strong sales to overseas markets.
Andrew Milligan, head of global strategy at Standard Life Investments, says: "Many clients have asked the company whether to favour other markets after the recent outperformance of European assets. The company's decisions will largely depend on the prospects for European earnings growth.
"If global activity remains upbeat in 2006 and there is prospects for further structural reform across the continent, then the arguments in favour of a heavy position will be hard to ignore."
Companies based in Europe have benefited from strong revenue growth in their overseas markets. More than 30% of the sales of companies such as BMW and Heineken, for example, are made in the US.
In addition, many European companies such as VW and Siemens have been forced by the more competitive environment to rationalise their cost base. In Germany, for example, many workers have agreed to work longer hours for lower wages in order to avoid jobs being relocated to Eastern Europe. The net result has been the ratio of profits to output in Germany returning to the previous high seen in 1997.
European stock markets have also benefited from the depreciation of the euro, as global investors reassessed the political and economic outlook after the recent 'No' votes on the constitution. The trade-weighted euro rose by 10% in 2003 and a further 2% in 2004. By contrast, it has declined by 4% so far this year, more so against the yen and won, thereby improving the competitiveness of European exporters against both US and Asian companies.
According to Milligan, the potential for political change in Europe will be a key consideration for investors to assess. For instance, a German general election is scheduled to be held in September, with the opinion polls currently suggesting that the opposition CDU party will gain victory over the incumbent SDP, led by Gerard Schröder.
The CDU's recent manifesto has a number of useful supply side measures designed to boost growth, most noticeably by lowering direct taxes. Markets will also be watching carefully to see what the potential new government's attitude is towards further labour market reforms.
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