Even though the political and economic environment in Europe remains in the doldrums, large-cap stoc...
Even though the political and economic environment in Europe remains in the doldrums, large-cap stocks will continue to perform well.
For several years, European companies' profits and stock prices have comfortably outstripped their countries' economic growth. Continental European equity markets have nearly doubled since the lows of March 2003, which has made them some of the best-performing developed markets in the world.
For example, the Standard & Poor's Europe 350 index was trading at 1,258.98 points on the 8 June 2006 compared to 853.11 points three years ago, while the MSCI Europe index was trading at 444.47 points on 8 June compared to 264.48 three years ago.
Although such strong equity performance could mean it would not be surprising to see European markets suffer a pullback at some point during the year, fundamentals remain sound and blue chip investors need not worry too much - despite the all-too-familiar political backdrop.
The gradual erosion of the nation state that has resulted from the steady march of globalisation has made it possible for European large companies to do well, even though their domestic economies struggle.
In Germany the economy is starting to look in better shape. For example, the widely followed German business confidence index, (Ifo), surged to a 15-year high, helping the country to reclaim its title as the economic powerhouse of Europe.
The Ifo index confirmed that corporates are fully exploiting strong global growth. For several quarters now, Germany's share of global exports has been rising steadily. This can be seen in German exporters, which have benefited from the increased spending on capacity and infrastructure by Brazil, Russia, India, and China.
However, despite the positive signs of the German Ifo index, unemployment is still falling slowly and, as a result of this and domestic demand, remains sluggish.
Other countries that remain in the political and economic doldrums include France and Italy.
In Italy, the result of the Italian election outcome was so finely balanced, with Romano Podi taking the seat from Silvio Berlusconi, it seems unlikely anyone will really be able to govern effectively over the next couple of years. Policy drift as a result of the change of government has prompted Standard & Poor's to suggest it may downgrade Italian bonds again. Clearly investors cannot afford to ignore the risks, but the point is they are not new and for Italians it really is business as usual.
In France rioting demonstrators forced the government into a humiliating climb-down over modest proposals for labour reform. The proposals would have made it easier to fire young people. Although this may sound harsh, nearly a quarter of the country's 18-25 year olds are out of work and this is because businesses will not hire them because they can not be fired.
The failure of the French reforms is a pity because they might have helped create jobs and enhance flexibility in the French economy. Of course, big companies have been wary of investing in France for quite some time, which helps explain why unemployment is high in the first place.
Germany's economy is improving
Large caps expected to perform well
France and Italy facing political and economical concerns
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