European Equities, what’s in store for 2010?
01.06.2010

2009 was a rollercoaster ride for some investors. Almost every sector experienced volatility. European equities were no exception, although the bottom of the trough was reached in March 2009. The question is: where do we go from here?

Many people have continued to steer clear of equities thanks to the unpredictability that characterised 2009. But the information coming out of Europe suggests that now is the time to think positively about European stocks.

The present upward trend offers a chance for the canny investor to ride the market on its way up to the peak. Although past performance can never guarantee future success, it is worth noting that since the 1930s each of the 14 bull markets that followed have lasted more than four years from peak to trough. If we are only one year (or less) into the recovery, 2010 could be an important investment opportunity for European equities.

What has given Guardian Wealth Management such a positive outlook? It’s true that the European Union, together with most of the rest of the world has recently experienced its deepest recession for decades. However, those austere times have forced the management of European countries to take a long hard look at their organisations and trim them down for maximum efficiency. Rather than the hand wringing and finger pointing that banks and governments have been engaged in, businesses have quietly faced up to the challenge of how to survive and prosper. Accordingly, despite a challenging economic climate, many European companies have maintained or even improved their profitability.

Some commentators have argued that positive results among public and private companies are only due to government stimuli and rescue plans. Political parties seeking re-election would certainly have us believe that this is the case, as they are keen to take the credit for saving the day. Governments cannot continue to prop up their countries’ economies, and whether demand from the private sector can step into the vacuum that will be left will determine the fate of many companies.

So the million dollar question, or rather the billion euro question is: what happens next for European equities when this government help stops? Household debt and government borrowing are undeniably high, and spending cuts are inevitable for most Member States across the European Union.

Perhaps the answer to that question lies in our perception of Europe, both as investors and as citizens. We have been conditioned to think of Europe as one block, but a closer look at the Member States’ financial circumstances reveals a union of very different countries with very different spending and saving habits.

Like Greece, the woes of the property and consumer debt fuelled economies such as Spain, Portugal and the UK have been widely publicised, and these countries are indeed feeling the pain. If there is going to be a “double dip” recession, these highly geared economies might be at risk.

But investors should not forget the other countries in the European Union. In particular France, Belgium, Sweden, the Netherlands and Germany may not have provided such exciting headlines for investors during the last few years, but these days exciting headlines are of the worst kind. Higher levels of savings and lower levels of household debt could provide stable bedrock for European businesses to grow in these “safer” economies, as they outperform the US and offer a more attractive proposition than other developed markets.

Beside the economic, political and cultural diversity that characterises Europe, investors should also take note that European companies make their money from a variety of sources. Demand for European goods from emerging markets continues to be high, particularly for luxury goods and food. In turn, this has propped up the revenues of European companies, so that nearly one fifth of their income comes emerging market growth.

From an investor’s perspective, there are several ways to benefit from the optimism that is growing around European equities. Whether you want to hold shares outright in listed companies or prefer to use investment or unit trusts to get access to the markets, Guardian Financial Management can recommend a product that suits your risk profile, your expectations and most importantly your pocket.