Why Europe's bull has legs
Western European markets have boomed over the past four years, hitting a six-year high in February. So can the bull run endure?
Western European markets have boomed over the past four years, hitting a six-year high in February. So can the bull run endure? Over the past few years, European firms have restructured and cut costs Germany's unit labour costs have fallen by 2.6% over the past four years and there is still mileage in this story: in Germany, the "full benefits of corporate restructuring have not yet fed through to earnings and share prices", says Julian Pendock of Bedlam Asset Management.
And the macro picture has been improving. The eurozone economy has resisted US weakness of late, expanding by 2.7% last year. The European Commission has lifted its 2007 growth forecast to 2.4%, thanks largely to a revived Germany. The IfW institute expects growth to eclipse last year's 2.7%, thanks to exports and business investment, while unemployment at a five-year low bodes well for consumption. Earnings growth, while expected to fall to around 7% this year from last year's double-digit pace, is likely to come in at double the US figure this quarter; dividends have exceeded expectations; mergers and acquisitions continue to provide support; and European markets look reasonably priced on a p/e of under 14. Merrill Lynch sees scope for European equities to produce a total return of 11% this year.
Merrill notes, however, that as profit growth recedes to the long-term average, as is now the case in Europe, volatility tends to rise, while European markets remain closely correlated to their global counterparts. Thus if US growth seriously disappoints, European stocks won't escape unscathed, despite the region's lessening reliance on the US economy. Merrill's list of defensive stocks now worth a look include Nestl, Heineken and Fresenius Medical Care, while Pendock deems Deutsche Telekom a high-dividend restructuring play. European funds highlighted by financial advisers include the Artemis European fund and the Argonaut European Alpha funds, as well as the SR Europe investment trust.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
A junior ISA could turn your child’s pocket money into thousands of pounds
Persuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
By Katie Williams Published
-
Cost of Christmas dinner jumps 6.5% as grocery price inflation rises again
The average Christmas dinner for four now costs £32.57 as grocery price inflation increases - but what does it mean for interest rates?
By Chris Newlands Published