Room for improvement

Room for improvement

June 16th, 2010

Europe excluding the UK has – probably unsurprisingly – been the worst-performing fund sector this year by a considerable margin. The average fund has dropped 7.41% since the start of the year, compared to a fall of just 0.68% in the UK Equity Income sector and 0.55% in the UK All Companies sector. Only five out of 108 funds have delivered a positive return. The reasons for the sector’s weakness are self-evident – particularly the extensive fears over the impact of the Greek bail-out on those providing the cash. Will it stall their recovery? Will it destabilise the eurozone if financially prudent countries are seen to be bailing those that have been financially lax? Will the austerity measures be successful or could a secondary crisis emerge? Funds within the sector have also suffered from the depreciation in the euro relative to sterling. While it is difficult to see through the fog of the crisis, if we recall JM Rothschild’s adage to buy when there is blood on the streets, does it represent an opportunity to buy into Europe at a relatively low price? Certainly there are reasons to think the situation in Europe may get better from here. Although economic growth in the eurozone has been anaemic, at 0.2% for the first quarter, it has not been disastrous. Italy saw the fastest growth, rising 0.5%. Spain managed 0.1%, while Germany reversed its weak last quarter of 2009 with growth of 0.2% – what is more, producing this growth in the face of a strong currency. With the euro substantially devalued against the dollar and sterling, growth should have been easier to come by in the second quarter. There is evidence this is the case. Two of Europe’s leading industrial bosses – Peter Loscher, chief executive of Siemens, and Leif Johansson, head of AB Volvo – have recently said in interviews with the Financial Times that they see no prospect of a double-dip and they are seeing little fall-out from the austerity measures. Both issued positive forecasts for next year. The euro is devaluing because of problems in Greece but it should create strong conditions for growth in Germany and France, who are the real might in the eurozone. This may be inflationary in the long term, but it could provide a significant earnings boost for eurozone companies in the shorter term. As in the UK, there is a danger of forgetting that many European countries are global in their outlook and not dependent on eurozone growth. The real question for investors now is whether they have the stomach for the ride. For all your investment needs call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400

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