Plenty of opportunities in Europe

Even after a four-year equity rally, when the MSCI Europe ex-UK index significantly outperformed the FTSE All Share, S&P 500 and TOPIX indices returning 108% compared with 96%, 42% and 76% respectively, Tim McCarron, Manager of the Fidelity European Fund believes there are a number of reasons why European markets still offer good prospects and value relative to other major markets.

At a conference on European investing recently, McCarron said: “After a four-year equity rally, I expect Europe to take a breather but with unemployment falling and cyclical divergence deepening, it is far from the end of the story.”

Unemployment in the Eurozone has now fallen to its lowest level since the early 1990s, underscoring the improvement in the region’s economic fortunes and there is a wave of optimism spreading across Europe, best encapsulated at the country level by the sentiment that “Germany is back”.

“German companies have been at the forefront of restructuring and have made significant changes to working practices.” said McCarron. “The still-powerful German unions have been forced to acknowledge that if they don’t compromise and negotiate with company management on restructuring and wage issues, they will lose jobs to Eastern countries were labour is abundant and relatively cheap.”

That positive sentiment is shared at other levels of the German economic bureaucracy. “We are at the early stage of a recovery that could go on for two three more years if we keep seeing improvements in the labour market,” Bundesbank President Axel Weber, said in an interview in January.

With the ECB succeeding in maintaining inflation within its 2% target zone, Europe does not face the same inflationary pressure as the US. “At the individual country level, economic performance continues to show cyclical divergence” continues McCarron. For example, exports have been a big driver for Germany in recent years but Spain and Southern Europe has been driven more by consumption. This is starting to change. There are signs that in 2007 and beyond, the German consumer will have more of an influence on European growth while the pace is likely to moderate in Spain.” This is a thought echoed at the conference by his colleague and Manager of the Fidelity European Growth fund, Alexander Scurlock.

McCarron concludes “The European economy appears to be in a different stage of the cycle – namely mid cycle – compared with the other regional economies. The cyclical divergence that remains so pronounced at a country level continues to provide a variety of attractive investment opportunities across the region and I believe European stock markets will perform well compared to other regions.”