Performance of indices in 2012
Source: FE Analytics
In Spain exports are showing more dynamism, the balance of trade has also improved, company productivity is increasing and unit labor costs are falling. France, the second largest economy in Europe, is also facing economic challenges: the country is stagnant and unemployment is increasing. Despite this, experts believe that the French government’s ‘Pact for Growth, Competitiveness and Employment’ is a step in the right direction to solve the economy’s problems.
Greece is the uncontested ‘problem country’ in the eurozone. It has been in recession now for five years and has repeatedly had to ask its EU partners for financial support. The economy has shown heightened competitiveness, the balance of trade has improved. In fact, the country has succeeded in recording a government primary surplus.
However, the elections in Italy and the resulting uncertainness might postpone a market upturn. There is good news as well, though. The German economy is robust, exports are in good shape and companies are well-positioned: solid balance sheets, attractive dividend returns and values continue to underpin further equity returns in the future. With such favorable conditions the German equity market could set a new record high this year.
Since the very beginning of the debt crisis, I have been pointing out that the debt problem is in marked contrast to the position of European companies. Many companies are in a very good position with newly rationalised product ranges, reduced costs and debt ratios at very low levels. Our in-house analysis allows us to identify healthy, market leading and international companies for our customers where we can invest with great confidence.
Last year saw considerable restructuring of portfolios in favour of European equities, something which investors will not have regretted given the very positive price growth. We believe that progress in mastering the government debt crises will continue this year and systemic risks will continue to abate.
However at the same time, government and central bank measures will ensure that interest rates persist at a very low level. When the various inflation rates are taken into account, many investors find they are achieving only negative returns in real terms.
Europe remains significantly underweight in many portfolios; however the current conditions are favourable. For the time being, the risk of a eurozone collapse has been rigorously reduced by the ECB assertions and improved competitiveness is clear to see in individual countries. In addition, prices remain very attractive in many cases and dividend returns disproportionately high – in some cases offering higher returns than bonds issued by the same companies.
It is in fact risk aversion from investors which causes equity prices to fall below the real value of companies in many cases. In order to be cautious, many still commit to first class government bonds while accepting their negative returns in real terms. If investors are prepared to rethink and increase their equity exposure, this could provide impetus for prices.
Britta Weidenbach has run the DWS Invest Top Euroland fund since September 2005. Since then, the €316m portfolio has returned 24.76 per cent, compared to 3.04 per cent from its DJ Euro Stoxx 50 benchmark.
Performance of fund versus index since Sept 2005
Source: FE Analytics
The Luxembourg-domiciled fund has a minimum investment of €1,000 and a total expense ratio (TER) of 1.66 per cent.