European consumer goods could struggle

Yesterday’s European Central Bank interest rate rise was entirely anticipated but basic consumer goods could struggle from here, according to Crispin Longden, manager of European Assets Trust, a top performing European small and mid cap closed end fund. Longden said that after raising the key refinancing rate for the Euro for the sixth time in the space of one year to 3.75% in March 2007, Jean Claude Trichet, president of the European Central Bank, had been signalling clearly that another 25 basis point rise was on the cards for June.

“What investors have to consider is that if inflation is running at 2%, yesterday’s rate increase to 4% means that real rates still remain quite low in absolute terms. The ECB continues to regard monetary policy as being accommodative and certainly, the impact on companies in general has been muted. Indeed, European companies remain very cashrich and for many investors the events surrounding the rate rise were quite positive. The ECB has not signalled that another rate rise is imminent and, furthermore, the bank has raised its forecast for the potential growth rate of the Eurozone economies to levels near those currently achieved in the US,” said Longden.

According to Longden growth predictions were being based on better labour productivity and stronger fixed capital investment.

“This is good news for the capital goods and industrials sectors,” said Longden. “Oil stocks and the basic materials sector should also continue to do well as will affordable luxury goods as consumers continue to spend money on the ‘feel good’ factor, whether that be an evening out or treating themselves to the latest must-have perfume. However, basic consumer goods such as food retail, real estate and to a certain extent financials could see profits drop off as consumers begin to tighten their belts. The dividend yield achievable from holding utility stocks will also look less attractive from here.”