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Going nap on Europe - a year late

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A year late maybe, but 2000 is shaping up to be much better for investors in Europe. The relative strength of the euro has acted as a boost to European bourses. The currency has come off the floor of its recent weakness as concern mounts about possible US$ weakness and the European mini-boom has rubbed off on other markets. In particular, technology and telecom stocks have benefitted globally from the aftermath of Vodafone’s landmark victory in its bid for Mannesmann.
Pooled fund strategy for the foreseeable future continues to favour the small and mid cap sectors and funds with a technology and telecom focus.
European small caps have been buoyed by positive sentiment towards the smaller cap asset class on a global basis. In the UK, smaller companies have seen a strong run as investors have become convinced that the economy would achieve a soft landing.
Fund managers are now commenting that the market appears to be operating in a more rational fashion and companies which are reporting positive earnings flow are being rewarded.
Adrian Fowler, manager of the Aberdeen European Growth Fund believes the economic environment in 2000 should be reasonably equity- friendly as growth re-asserts itself and inflation stays low. He expects prudent stock selection across all sectors of the market to provide the bulk of outperformance, and that a reasonably well balanced style strategy will provide a positive contribution.
Mainstream exposure to Europe can be gained from a fund such as Henderson Horizon European Fund, in which a flexible investment approach is followed, providing a balance to the more pure growth focus of a fund such as Invesco GT European Warrant. Rory Powe, manager of the Invesco fund, has had a heavy telecom bias and has benefitted from the powerful movement in the telecoms sector. The strength was led by the Vodafone/ Mannesmann situation and by other exciting developments featuring CMG, Vivendi and others. This is not likely to be a short term phenomenon; expect this sector to perform strongly for the rest of the year.
Exposure to emerging Europe is likely to prove beneficial to a euro portfolio on a medium term view. There is expected to be a strong rally in 2000 as the convergence theme maintains its momentum. Taking the region as a whole, there are good reasons for investors to be optimistic of growth prospects, but this year has once again shown the divergence of performance from one market to the next. A position in the Fleming Flagship Emerging Europe Fund, with its focus towards the Central and Eastern European economies, and also to those of Greece and Turkey, represents a good opportunity for diversification into this region.
In common with many European portfolio managers, Adrian Paine, manager of the American Express Epic Euro Equity fund remains short of defensive stocks in favour of technology and cyclical related sectors of the economy. He is underweight financials and is increasingly pessimistic on the medium term prospects for profit margins within the banking sector in particular. He is equally unimpressed by the prospects for pharmaceutical companies. He points out that they still trade at a premium to the broader market despite weaker and in many instances declining cashflow and he maintains a zero weighting accordingly.
We must be alive to the possibility that the cyclical rally in Europe, which is very much a repeat of events in1999, is vulnerable to potential interest rate rises from the ECB. The difference is that the bank will be responding to stronger growth rather than higher prices, as many of the factors which were driving inflation in 1999, such as higher oil prices will not be repeated in 2000.
Schroders has raised its forecast for global growth in 2000 to 3.5%, largely on the basis of continued strength in the US and stronger than expected activity in the Eurozone. Although there are clear signs that consumer spending is picking up in the eurozone, in the UK and Japan.

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