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George Orwell once said that “to see what is in front of your nose needs a constant struggle”. He probably wasn’t thinking about finance, but this applies to many UK investors: amid all the excitement about emerging markets, they have neglected opportunities closer to home.
Take Europe. Continental markets have raced ahead of their UK and US counterparts over the past few years, and the region is still well worth a look…
Often dismissed as a hopelessly sclerotic has-been, the continental economy has sprung back to life. In fact, “it’s giving a good impression of being back as a global economic powerhouse”, as Ralph Atkins notes in the FT. GDP growth hit 3.1% in the first quarter.
A buoyant global economy has boosted exports–shipments to Asia and Eastern Europe have risen especially quickly–and business investment is expanding at the fastest pace in a decade.
In Germany, which accounts for about a third of the eurozone, exports and business investment now look set to pass the baton to consumption, thus keeping growth going. Germany’s notoriously stingy consumers increased spending by the largest amount in four months in April, suggesting that they have shaken off a VAT hike early this year. The European Commission expects private consumption to be the main driver of German growth in 2008. This year, German GDP growth should reach 2.8%, according to the OECD.
Unemployment at a six-year low and an uptick in consumer confidence bode well. And as Edward Hadas notes on Breakingviews.com, German consumers’ – and companies’ – relatively low debts leave the country better placed to weather rising global interest rates than its Anglo-Saxon rivals.
The eurozone’s strong performance isn’t merely a cyclical upswing; there have been structural improvements too. Changes to the benefits system in Germany, for instance, have pushed people into the workforce.
But the key point about structural improvements in Europe over the last few years is that companies haven’t been sitting around waiting for politicians to push through reforms. “Inaction by governments has forced companies to take matters into their own hands”, says Bedlam Asset Management.
It’s just as well. While there has been some government action in Germany, Barclays Capital’s Thorsten Polleit, for one, has “given up waiting for a consistent reform programme”, as Wirtschaftswoche noted recently. The government did manage to push through a corporation tax cut, but there has been scant sign of further labour market deregulation. And recently the coalition has had trouble agreeing a smoking ban.
So corporations have outsourced, restructured drastically, and negotiated flexible working agreements and lower wage increases with trade unions. DaimlerChrysler managed to cut head office staff by a fifth. Even Deutsche Telekom has adopted a “perform better or die” attitude, notes Bedlam. If a “market Neanderthal” like Deutsche Telekom can change, “the rest of Europe will too”.
The restructuring trend has been particularly pronounced in Germany, but Sweden is also notable for restructuring success stories, says Bedlam. Corporate revamps, along with the strong global economy, have boosted competitiveness and given earnings a hefty fillip. German unit labour costs have actually dropped by 10% over the past decade (while they have risen by the same amount in Britain).
Carmaker VW reported an earnings increase of over 100% in the first quarter. Overall European profits are 60% higher than in 2000, and return on equity has doubled. This year, earnings have been revised upwards consistently (while in America earnings momentum has fallen) and are set to grow by another 7-8%. Germany is steaming ahead: German companies in the pan-European DJ Stoxx 600 index are now expected to earn 9.3% more this year.
Meanwhile, valuations remain reasonable, with the Stoxx 600 on a PE of below 14. Germany is still among the cheaper eurozone markets, with the rerating process amid Germany’s improved structural performance far from over, according to Alain Bokobza of Societe General.
While Germany looks promising, so does France under Sarkozy, reckons Rob Burnett of Neptune Investment Management. His attempt to introduce long-awaited reforms such as dismantling the 35-hour week may cause unrest, but it would give French productivity a considerable boost.
Given all this, it’s no wonder Burnett sees “compelling opportunities” across the channel.
Turning to the wider markets…
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In London, the FTSE 100 ended yesterday with good gains, adding 39 points to end the day at 6,559. Miners Antofagasta, Xstrata, Lonmin and Rio Tinto led the way, all notching up share price gains of over 4%. For a full market report, see: London market close.
Across the Channel, the Paris CAC-40 added 36 points to end the day at 5,945 whilst the Frankfurt DAX-30 was 2 points higher, at 7,680.
On Wall Street, US stocks rallied as upbeat economic data saw bond yields fall back from recent highs. The Dow Jones added 187 points to close at 13,482, its biggest one-day gain since July 2006. The tech-heavy Nasdaq was up 32 points to 2,582. And the S&P 500 gained 22 points to end the day at 1,515.
In Asia, the Nikkei also notched up three-figure gains yesterday, rising 109 points to close at 17,842.
Crude oil was little-changed at $66.28 today,whilst Brent spot was flat at $70.06.
Spot gold was up to $650.20 from $647.20 in New York late last night and silver was unchanged at $13.08.
Turning to currencies, the pound was at 1.9693 against the dollar and 1.4794 against the euro, whilst the dollar was at 0.7510 against the euro and 122.87 against the Japanese yen.
And in London this morning, recruitment consultancy Hays plc‘s shares jumped by nearly 8%, their biggest gain in over four years, after the company announced that it had hired more workers to curb a UK slowdown. Fees from the UK and Ireland rose 13% in the second half, compared with 8% in the first six months of the year, whilst fee revenue from Asia Pacific and continental Europe grew by 35% and 33% respectively.
And our two recommended articles for today…
How to spot an inflation shock
– Bank of England Governor Mervyn King has likened his job to a ‘spot the ball’ competition, but with potential inflation shocks rather than balls. So where’s the next rate hike likely to come from? To find out whether it’s cheap credit, rising food prices or something else entirely that Mervyn could mark out next, read: How to spot an inflation shock
Three reasons agricultural commodities are set to rise
– Climate change and a growing global population are putting pressure on supplies of agricultural commodities. However, as one agribusiness stock found, the supply and demand dynamic for the agricultural commodities market isn’t quite as straightforward as that. For more on the opportunities – and the odd threat – ahead for the agribusiness sector, click here: Three reasons agricultural commodities are set to rise