The successful restructuring of the Dutch economy is attracting the attention of other European countries seeking to strengthen their international competitiveness, reports John Lappin
The Dutch economy is the subject of media scrutiny in continental Europe as countries look for a blueprint for increased competitiveness. Economic success, reflected in recent stock market performance, suggests that the Dutch market is at the very least moving in the right direction.
Investment bank Goldman Sachs has reinforced the message. Its recently published economics an-alysis is entitled The New Dutch Model - A Blueprint for Continental Europe? Germany and the German press in particular are looking for answers to unprecented levels of unemployment and a firmer reform agenda, so far characterised by hesitation.
But, turning to the Netherlands itself, the report states that real GDP rose by 11.4% between 1991 and 1996. A 1.1% rise in unemployment over this period was due to a sharp increase in the labour force; actual employment increased by 6.7%. In France and Germany, by contrast, employment dropped by 0.9% and 5.3% respectively. Real wages in the Netherlands dropped by 0.6% compared to a real increase of 8% in Germany and 3.7% in France. The fall in Dutch labour costs is largely the result of a reform package agreed by government, employers and the unions, implemented since 1983, which consolidated public sector finances and and deregulated the labour market. Public sector expenditure has been reduced from 60 to 50% of GDP.
Turning to the current market position, analysts are for the moment neutral about Dutch equity because of the prevailing interest rate climate. Nevertheless, Dutch equity has already produced good growth in the past year, partly as a result of restructuring.
Martin Slendebroek, first vice president, Dutch equity research, at Merrill Lynch in London says: In the early 1980s Holland had stagflation. While the UK and Scandanavia enjoyed the roaring eighties, Holland had zero earnings growth.” Prompted by this, he says, the country has repositioned itself, keeping the lid on wage cost inflation and improving its competitive position enormously. “This has had a great impact on corporate profitability. Apart from the re-rating all European companies have undergone, the Dutch quoted companies have had something on top which was stronger than the cyclical margin increase.”
He also believes that there is scope for more restructuring. “We are positive on the Dutch economy. Our market opinion is neutral. That is because we think it has performed so strongly, that some companies need to catch up with the market. A lot of the improvement has been factored in already.”
Frits Moolhuizen, chief investment officer at ING Asset Management in the Netherlands, believes that such changes have made Dutch companies much more desirable. “We have had strong restructuring and business refocusing with corporate shifts last year of around Dfl35bn ($18bn), around 5% of the market total. The cost of capital last year was very low and you would expect a further shake-up of the corporate environment.”
Moolhuizen continues: “We are living in an envir-onment where there is more worldwide competition with companies refocusing on their core business. If you see how Dutch companies are restructuring their business portfolios there is great potential.”
However, there is some divergence of opinion between Moolhuizen and Slendebroek.
Giving his assessment of why the Dutch economy has performed so well, Moolhuizen says: “I think that from the macro point of view, what makes the Dutch economy different is that we have more international exposure. We are more dependent on the US in terms of earnings than Germany.”
He continues: “Fifty to 60% of total earnings derived by listed Dutch companies is coming from the US. We have less cyclical stock. Including Philips, you get a total market capitalisation of 12 or 13% for cyclicals. In France or Germany it is much higher. I would say that the quality of Dutch companies is higher, more reliable and less cyclical than others.”
Slendebroek disagrees: “The Dutch stock market is closely linked to the US stock market with large companies like Unilever, Royal Dutch and KLM making a very large impact on the index. For an important percentage these are really US companies. “If you look at physical exports from Holland to the US that is a small figure. Ten years ago there were few quoted Dutch companies in Germany but a lot of them were big in the states. Now a lot of these companies are looking east. That is where a lot of people see expansion opportunities.”
Dutch asset management is also plays a significant role in underpinning the market, and the institutional market is witnessing change, albeit slowly. Pension funds are becoming more pro-equity in culture while regulation continues to ease.
Says Jacob van Eeghen, general manager at ING Asset Management: “There has been a much greater focus on equity investments: a shift seen by a lot of asset liability studies.”
But he believes that they may be embracing the middle way, much discussed for the economy in general. “If you look at the Anglo-Saxon way of investing money, I feel that the Dutch are more or less in the middle. Our asset managers are more likely to find ourselves having the same ideas as French and German pension funds,” he says.
Moolhuizen estimates that 50-60% of total activity in the Dutch market is institutional, with most of the demand coming from click funds, which limit potential losses on the downside of investment.
Jacques Grubben, associate director of Dutch asset manager GIM (General Investment Management), has also recognised this trend. “People are more and more aware that they have done things wrong in the last two years, by sitting on low interest savings deposits which are not fiscally attractive while they can gain by investing in the equities of companies with a good financial rating and good liquidity.”
He continues: “Private investors have more and more opportunity via their pensions and their mortgages to do something in equities. That has increased demand while the economic fundamentals, not only macro but also micro economic, are quite sound.”
Grubben also believes that overseas investors have become more important. “The Americans have been discovering Europe, but their pattern of investment differs from that of domestic institutions. Americans go in at an earlier moment than domestic investors and go out at an earlier stage.”
The dominance of this money is backed by the Dutch strategist at Banque Paribas in London, Oscar Poos: “Over 1996, foreign institutions were net buyers of Dutch equity. That was certainly driving the markets in the second half of the year. Most major companies are internationally orientated. Most of them have 50% of their sales outside the Netherlands, quite often it is the US or UK. The whole market is quite Anglo-Saxon. It is quite easy to understand why quite a few foreign institutions are covering the market quite closely.”
He adds that the Dutch mid-caps are mostly domestic and if they are in other countries it is mostly in Germany.
His recommendations reflect the increased flexibility of the economy. They include life insurance stock, as the government pulls back from social security provision. As Poos observes: “Holland is no longer paradise on earth for the unemployed.” It also includes export stock, given the exchange rate, and construction, as the country embarks on an infrastructure programme because of healthy public finances.
He does raise the problem that arises because the Dutch economy is out of sync with Germany while the currency is linked. “Interest rates are a bit low and the economy is growing fast. You would like to put the brakes on very slightly because of an inflation rate. It has a very specific impact. Though at these currency levels it is not very significant.”
This brings up the prospect of the Euro. In Holland there is little doubt about the inevitability of the European project. The reorganised stock exchange is hopeful that some Dutch stocks now traded in centres such as London and Frankfurt will return to Amsterdam when there is no longer any need for in-stitutions to hold guilders. Analysts say that Dutch companies have made all necessary provisions.
Apart from some inflation worries and despite its pole position for the convergence criteria, the whole project is regarded as a European rather than a Dutch one. As Poos says: “The US dollar and sterling won’t be in the area while the guilder/ Deutschmark rate is already fixed. I don’t think the impact will be too much. It is basically an all-European story.”
Some recent consolidations in the financial sector clearly have Europe in mind. This was underlined by the purchase recently of MeesPierson by Dutch insurer Fortis, following on from increasing ties between Rabobank and Robeco, which has signalled its intention to make European acquisitions.
These alliances are part of a European strategy with direct implications for pensions investment, as Dutch companies seek to use the skills honed in an already developed pensions sector to move across Europe.
Fortis last month formed a new asset management entity, Fortis Investments, resulting from the merger of its existing, largely insurance-related, asset management business with MeesPierson Capital Management. The merged company began trading in March and with Dfl43bn under management is the third largest asset manager in the Netherlands. David Voûte, managing director, funds and international investments, at the new entity says the company intends to become a force in asset management across Europe.
Aside from such long-term ambitions, however, there is some debate over what impact the Euro will have on equity investments.
Grubben from GIM believes that significant progress has already been made towards sectoral development but ING’s Moolhuizen is cautious about how fast change will come: “I don’t expect to move to an increased consideration of sectors. I think a lot of people make the mistake of looking at Europe like America, but we are not going to have a United States of Europe. American companies are more American than European companies are European. The second market for a lot of Dutch companies is not Germany, France, Belgium or Switzerland but the US.”
The Goldman Sachs study concludes that Holland’s success in increasing flexibility while maintaining the consensus is not applicable to larger European states which may have to accept the inevitability of the Anglo Saxon model. But turning to Holland itself, an economically successful entrepôt with high-quality companies - whether viewed by sector or country - it is clear that the attentions of investors will be merited long after the media spotlight has turned to another quarter.
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