European Investment Opportunities
There’s really a very good case to be made for shifting your
money into Europe this year. Although we wouldn’t want to
exaggerate Europe’s ability to detach itself from the fate
of the US economy, we’re not alone in thinking that its fundamentals
are altogether more healthy than those of the US.
It doesn’t have America’s hideous trade deficits;
it doesn’t have such bloated expectations of its stocks; and
it doesn’t rely on a big influx of fickle foreign money just
to keep going. Admittedly, it has somewhat higher unemployment than
the States - but then, most economists would say that America’s
own low joblessness rates are too low to be really healthy or sustainable
anyway.
European Investment Opportunities & Europe
More seriously, Europe has some important cultural differences from
the States. It has an extremely tight commitment to low federal budget
deficits, which will set it clearly apart from George Bush’s
tax-cutting administration in the next few years. Indeed, refraining
from government overspending is a formal contractual commitment which
is part of the emu package, so that’s one thing that’s
unlikely to change, for a start. If you fancy Europe but still
want to hedge your bets, you could do worse than looking at the
new range of index tracker funds that were launched in January by
the new Euronext exchange - the first European exchange outside
London to offer such a facility. Euronext, in case you haven’t
heard of it, is the result of last September’s merger between
the Paris, Amsterdam and Brussels stock exchanges.
European Investment Opportunities - Dow Jones Euro Stoxx 50 Index
Its star product is a tracker which follows the Dow Jones Euro
Stoxx 50 index, a handpicked portfolio of 50 large euro-zone companies.
But you can also track the Paris-based CAC 40, and in March a new
pan-European sector tracker, called the AEX Index eShare, will come
online in Amsterdam. Of course, you could just simply buy one of the
many London-based trackers that are available for the FTSE Eurotop
100 and Eurotop 300 indices. One of the odd little things that
have surfaced about Europe recently is that investors are dumping
some of the safety stocks they’ve been buying over the past
year, and they’re now buying riskier investments instead.
During January, for instance, the average European non-cyclical
stock (food retailing, drugs, health, beverages etc) lost 8 per
cent of its value while cyclical stocks (automobiles, furniture,
general retailing) rose by 8 per cent.
European Investment Opportunities & Computer Services
But if you think that’s a strange thing to happen in a time
of looming uncertainty, take a look at what’s happened in
computer services. In the first five weeks of this year, while the
Nasdaq was still plagued by uncertainty, the Eurotop 300 index for
software and computer services gained 21 per cent, and London’s
own equivalent index improved by 20 per cent.
What’s going on? Two words - capital migration. European
companies are now picking up a huge amount of interest from US investors,
who see Europe as a land of continued opportunity now that things
are stalling at home. The prospect of a currency gain from the euro
has added extra spice to the prospect that many US institutions
see in Europe’s fundamentally sounder economy. And they’ve
been joined by many European investors who are also repatriating
some of the cash that they’ve put into US markets over the
past three years.
European Investment Opportunities - European Stock Price
Has it all been a bit overdone? Well, possibly. Look at a European
stock price these days and you’re very likely to find
that it commands a higher price in relation to profits than
its US counterpart. Compare, for example, the price/earnings
ratio of 69 that you’d pay for Germany’s SAP software
consultancy, or the 57 for Britain’s Sage, with the 34
that you’d pay for Microsoft in the US, and ask yourself
which has the better long-term prospects.
Or try and figure out why the troubled Daimler Chrysler motor
group currently rates a p/e of 7 in Frankfurt but only 5 in
New York. Could it be just the lure of the euro that’s
lifting the German price by 40 per cent? Probably not. Rather,
it looks as though some parts of the market are simply getting
over-enthusiastic.
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