Amid all the fuss over emerging markets, investors often overlook opportunities closer to home. Just over the channel, for instance, the MSCI Europe index of continental markets is up by 136% since the March 2003 low, while the FTSE 100 has doubled. Germany’s Dax index has more than trebled. The overlooked continent boasts “some of the best investment opportunities in the world”, according to Merrill Lynch’s Richard Bernstein.
This week, however, investors are taking a fresh look thanks to France’s new president Nicolas Sarkozy, who hopes to revive the “sick man of Europe” with market-friendly policies including tax cuts and labour market liberalisation. If he succeeds, he should “free up the labour force and boost profits for most companies”, says Peter Jarvis of the Foreign & Colonial Dynamic fund.
Investing in France: strong European growth
While investors are hoping France will get its act together, the rest of Europe already has. Growth is set to outpace the US for the first time since the turn of the century. Eurozone GDP grew at an annual rate of 3.1% in the first quarter, and the European Commission has just hiked its 2007 growth estimate to 2.6%, while economic confidence is close to a six-year high. Chalk it up to a strong recovery in Germany, which accounts for about a third of the eurozone.
To read the most important markets news from around the world every week – and how it affects your investments – click here to sign up for a free three-week trial of MoneyWeek.
It grew by 3.6% in the first quarter, with unemployment at a near six-year low and consumer confidence rising to a record, boding well for consumption, hitherto the missing link in the export- and investment-led recovery.
Europe’s strong growth is structural as well as cyclical. Governments have done little but companies have restructured drastically in order to improve their performance and competitiveness. In Germany, pay or job cuts negotiated with unions and pervasive cost-cutting have ensured that unit labour costs have fallen steadily over the past few years. “If such a dinosaur as Deutsche Telekom can adapt, then most of Europe will too,” says Bedlam Asset Management. Add robust global growth to widespread restructuring, and you can see why European earnings are 60% higher than in 2000 while return on equity has doubled, as Tom Stevenson notes in
The Daily Telegraph.
A recurrent worry for European economies is the impact of a weakening dollar on exports. A 3% rise in European currencies against the dollar implies a 1% drop in European earnings growth forecasts, according to Citigroup. But its studies of continental markets over the past 13 years suggest the most important market drivers “do not include exchange rates”. And domestic strength is currently offsetting any earnings hit by the dollar, it says. Meanwhile, rapidly growing exports to eastern Europe and Russia, as well as to Asia, have reduced Europe’s exposure to the US.
European profit growth, expected to total 8-9% this year, has been gaining impetus as US profit growth is slowing, while mergers and acquisitions, partly spurred by private equity, should continue to bolster the markets, says Rob Burnett of Neptune Investment Management. Valuations are also still reasonable; Heather Connon in The Observer notes that European multiples are below riskier Asia’s. Merrill Lynch’s Karen Olney says European large-caps haven’t been this appealing for 20 years. Given all this, it seems it’s not too late to join the party.
Investing in France: the best stocks and funds
French stocks highlighted by the The Sunday Times as likely to be among the main beneficiaries of a Sarkozy victory in France include DIY giant Mr. Bricolage (MRB), supermarket Carrefour (CA), construction group Bouygues (EN) and luxury goods retailer LVMH (MC). Recommended European funds include Baring European Growth, Jupiter European Special Situations and New Star European Growth.
To read the most important markets news from around the world every week – and how it affects your investments – click here to sign up for a free three-week trial of MoneyWeek.