Is Europe poised for recovery?

Markets worldwide have been soaring recently and Europe is no exception. At the end of the summer, the FTSE Eurofirst 300 was at 943 - its highest level since November - and the French and German bourses also hit new highs for the year, with commodities and banks leading the way.

However, a rising stockmarket is by no means the same thing as an economic recovery - and the jury appears to be out as to whether such a recovery is actually under way.
Bullish view

At the bullish end of the spectrum, Barry Norris, managing partner at Argonaut Capital, which runs three European funds, boldly claims that bearish predictions of a protracted trough are now looking 'stale' and there is "mounting evidence that European economies are poised for a sharp recovery".

"I expect most major European economies to grow between 2% and 5% from now until the end of the year," Norris says.

He points out that although there has been a collapse in industrial production, demand has declined much less. "Car sales, for example, are down 20%, but car production in the US, Germany and Japan is down 40%, so you're going to run out of cars even without an increase in demand as a result of people holding off over the last 18 months."

And demand for European models is likely to be boosted further by factors such as the demise of Chrysler and GM and the introduction of the scrappage scheme in Europe.

Other less upbeat commentators are concerned about the continuing lack of credit availability. Another big issue is unemployment, which continues to rise as companies in Europe find it easier to make redundancies than in former days. That, however, is good news for companies in their fight to trim costs and stay in business, adds Dave Dudding, co-head of the Threadneedle European equity team.

But he and colleague Philip Dicken forecast that the  recovery will be a slow process, with the eurozone economy contracting by 3.3% during 2009, and showing only marginal growth in 2010.

That cautious sentiment is echoed by Rob Burnett, who runs Neptune European Opportunities fund: "For the Eurozone there's a three to four month lag [behind the US economy], so we can see things getting a little better there in the next two or three months. But the harsh truth is that we don't see much of an aggressive rebound - it still looks a stagnant and pretty soggy environment in Europe even in 2010."

Less sanguine

Martin Bamford, a financial planner at IFA firm Informed Choice, says he is tactically underweight in Europe, because of concerns over the diverse nature of the different economies: "There's some great potential, especially among the more developed and internationally oriented economies - France, Germany, Italy. But newer entrants to the eurozone have the potential to hold recovery back."

Bamford therefore emphasises the need for genuinely active managers: he recommends CF Odey Continental European for its consistent performance and Cazenove European for its geographical flexibility.

Certainly, managers agree that equities are attractively priced, and that canny stockpicking is now paying off. As Tom Beevers, manager of Newton Pan-European fund, puts it: "A selective approach can generate strong returns, regardless of the market direction." He favours shares "where dividends are well covered by cash flow", and growth shares with great long-term prospects, trading at "close to trough valuations".

Ultimately, as Norris stresses, the time to buy equities is coming out of recession, when the market has been derated and surviving companies are lean and mean.

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