Patient back on his feet
Economic recovery boosts market confidence
TWO YEARS AGO, Europe was deemed a great disappointment, with Germany in particular written off as “the sick man of Europe”.
A low point was the constitutional crisis triggered by the French and Dutch referendums, which was a blow to Europhiles and emboldened Eurosceptics. The European Union was seen to be in decline or disarray, and in desperate need of democratic reform.
Forgotten, of course, was a decade of impressive integration, with a single market, single currency and enlargement.
Andrew Moravcsik, professor of politics at Princeton University and senior fellow at the Brookings Institution, said: “The mistake had been to upset this pragmatic arrangement with an idealistic scheme for greater deliberation and high-profile constitutional revision, which was then oversold to the European public”.
In short, most Europeans didn’t want ambitious quick fixes. They were generally content with what had been achieved and sought a return to the politics of quiet, incremental reform.
Though still pretty complex, the politics of Europe have sobered somewhat since 2004, the economy has improved dramatically, and this has been reflected in the markets.
The European Commission is looking to real economic growth this year of 2,4% (slightly down on last year’s 2,8%, which was the highest since the start of the decade).
The German and French economies are looking considerably healthier, with growth rates at around 2,6% and 1,9% respectively. High fliers include Sweden 5,1%, Spain and Austria 3,6%, Switzerland 3,2% and Belgium 3,1%. Inflation has hit its lowest level in seven years.
Major drivers are a sensible monetary policy, a buoyant corporate sector, strong exports, and greater labour flexibility in countries such as Italy and Spain. The recent enlargement of the EU has also provided access to a massive pool of labour and capi-
tal. The Baltic countries, for instance, are growing at about 8% a year. This is not only the result of accession but also simpler tax systems, lower regulation and smaller public sectors.
In last month’s “Raging Bull” awards, the best offshore Europe general equity fund was the Aviva Funds European Convergence Equity Fund, which has generated a 62,2% return during the past year and averaged 46,33% annually over three years.
Other impressive performances were by Aviva Funds European Property Fund, which generated 75,08% for 12 months, Invesco Pan European Small Cap Equity 63,7%, Invesco Pan European Structured Equity 53,59%, Barclays Investment Funds (Lux) European 51,55%, Stanlib Offshore European Smaller Fund 51,54%, and Ashburton (Global) European Equity 51,53%.
Several leading international analysts believe Europe is still good value. This is shown in the price:earnings ratios: Netherlands 12,5, Germany 14,1, UK 14,2, Hungary 14,5, Belgium 14,7, Sweden 15,1, France 16,1, Ireland 16,6, Norway 17, Russia 17,2, Austria 17,3, Italy 17,6, Finland 17,7, Denmark and Poland 19, Switzerland 20 and Spain 22,1.
Confidence in the Eurozone also remains high. German, French and Dutch business confidence in particular has brightened markedly. This has in turn spurred further merger and acquisition activity and generated positive corporate newsflow.
A considerable amount of money is also finding its way into European markets from the US and Gulf States. The Americans are heavily engaged in private equity deals, while Arab investors with “petrodollars” derived from oil activities are finding Europe increasingly attractive, outstripping their investment opportunities at home.
Analysts say the strong interest in European companies is not a deliberate move away from the US. The bias towards Europe is rather that there is more opportunity to make money.