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European schemes eye equities – ABN Amro

EUROPE - Pension funds and insurance companies may increase their exposure to European equities amid a less pronounced asset liability risk view, ABN Amro says.

“We believe European equities are fundamentally attractive,” the bank said in a research note. “2005 looks like will be an unspectacular but profitable year for European equities. On top of that, we believe there will be significant flows into equities though the first quarter.”

The risk compensation that market awards to equities has not shrunk in 2004 as it has happened for credit risk, the bank has also said.

“We believe some insurance companies and regulated pension funds may well increase equity weightings at the beginning of the year as the equity risk from an asset liability point of view is less pronounced at the beginning of an accounting year.”

Potential disappointment may await investors who chose media and autos, while energy and industrials could deliver “positive surprises”.

The bank has also warned about the risks that “record levels of leverage”, which expose investors to risks they are not compensated for, pose to the financial markets.

These risks seem not to be yet on everyone’s radar. “In recent years, rising leverage has boosted performance of corporates, consumers and financial markets … but also the risks that a potential de-leveraging brings.”

Unwinding of leveraging may cause “a hiccup”, but not in the short run, AMB AMRO said, recommending investors to either wait or remain vigilant for signs of leverage unwinding.

European consumers are in for another difficult year, but the bank said: “it is easy to remain bearish too long on a consumer recovery. When it comes, it is likely to surprise. We maintain our bearish call, but will revisit the theme later in 2005.”

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