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Europe offers investors macro gloom but micro boom
Posted by Randy on: 2005-09-27 07:48:57
Europe offers investors macro gloom but micro boom
LONDON: Glance at today's spluttering euro zone economy and the political chaos in some of its leading countries and you might expect to find a lot of glum investors nursing losses and turning their backs on the region.
You would be wrong. Its stock markets are galloping along as if stagnant economic growth were a buy signal, while government bonds appear to heed neither deficits nor data.
In short, there is a disconnect between what investors are actually doing in the euro zone and what fundamentals might normally be telling them to do.
As Michala Marcussen, associate strategy director at France's Societe Generale Asset Management puts it: ''We have macro gloom and micro boom.'' The reason is globalisation. Investors are looking past the poor fundamentals of euro zone economics to global realities -- good world growth, cheap money almost everywhere and fierce competitive pressures driving companies to keep in shape.
The macro gloom is nonetheless evident. Despite hopes that 2005 would be a year of catch-up for the 12-nation currency bloc, annual economic growth is likely to be no more than 1.2 per cent according to the International Monetary Fund.
One-time powerhouse Germany is growing at about 0.8 per cent while Italy is teetering near recession. France is doing slightly better at around 1.5 per cent, but compares poorly with 4.3 per cent overall world growth and 3.5 per cent for the United States.
Politics are also far from smooth with reforms to create more dynamic economies threatened by various internal crises.
Over the past few months, the European Union constitution has been rejected in France and the Netherlands, Germany elections have failed to provide a clear result and Italy's economy minister has quit in a row over the central bank governor.
''What you are seeing on the macro level is political stalemate,'' said Gavin Rankin, head of investment analysis in Europe for U.S. wealth manager Citigroup Private Bank.
BEYOND EUROPE Investors are behaving as if none of this matters. Money continues to pour into euro zone assets, most of it from abroad, with the result that euro zone stock markets have been among the best global performers.
The broad DJ STOXX index of euro zone shares is up more than 16 per cent for year to date, the DAX index of German blue chip stocks has gained more than 17 per cent and France's CAC blue chip index more than 19 per cent.
Even Italy, with its moribund economy, has seen its MIB 30 index rise more than 11 per cent so far this year.
The search for yield, meanwhile, has kept up demand for euro zone government debt almost regardless of the economic or political state of its issuer. The spread between Italian and benchmark German 10-year yields is only around 20 basis points.
It is conditions apart from domestic macroeconomics that are driving assets.
The bond spreads, for example, are underpinned by the European Central Bank's view that euro zone government issuers are all created equal. Rising U.S. interest rates, meanwhile, are driving bond money to Europe, rather than the euro zone having anything special to offer.
In a similar vein, the stock market boom is in part brought on by Europe's interdependence with the rest of the world rather than its domestic condition.
Global growth, led by the United States, is relatively robust and effectively dragging euro zone sentiment along with it. The U.S.
economy, indeed, is often treated by investors in the euro zone as more important than domestic indicators.
Internal research from Legal & General Investment Management, its economic consultant Andrew Clare says, showed European markets often looking past euro zone data when it is released but reacting sharply to U.S. releases.
PRESSURE One of the main driving forces of the stock boom, however, is the behaviour of German companies, many of which have a huge global presence.
International giants such as Volkswagen, Schering and Allianz are hardly hostage to demand from German consumers.
''The German equity market does not really represent the German domestic economy,'' L&G's Clare said.
Many of these companies -- joined by others in various parts of Europe -- have had to restructure, cut costs and outsource in order to compete on the world stage, regardless of local economies and politics.
''On the micro level you have multinationals that are faced with competitive pressures,'' Citigroup's Rankin said. ''They are basically forced into a situation where they have to restructure.'' As a result, international investors are attracted by the potential profits from sleeker companies doing business in what is, for now at least, a buoyant world economy.
With stocks from different euro zone companies often bundled into investment vehicles and markets generally awash with money from loose monetary policy, demand for German stocks spills over into other bourses where specific factors are also at play.
Gains in Italy and France, for example, are being helped by the presence of oil sector stocks in their indices.
But the performance of euro zone stocks does belay the state of local economies. So if the world economy were to slow more than expected or internationAL investors start to look elsewhere, there would be little for European bourses to fall back on.
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