03/12/2007
International Investment - December 2007
European Equity Markets Remain Relatively Attractive for 2008 - Despite Currency Movements
Many investors are worried about the outlook for european equity markets into 2008 given the continuous strength of the euro. However, we believe there are clear structural trends that make european markets relatively attractive - in particular, an increased focus on shareholder value and exposure to emerging markets.
Investors are right to be worried about european equity markets when the euro keeps strengthening as approximately every 10% upward move takes around 3% off european profits. While valid, this analysis is static and therefore does not incorporate companies’ ability to react.
Focus on shareholder value is a key driver for european companies - in particular for Germany, the european economy most affected by the strength of the euro. Daimler, the car and truck manufacturer, decided to sell their loss making US unit Chrysler to Cerberus, not only stopping further losses but also changing the risk profile of the group. This change will allow the company to return more than €7bn to shareholders and start concentrating on delivering best-in-class performance in their main operations, Mercedes and trucks.
In addition to focus on shareholder value, european companies have an increasing presence in emerging markets. This presence is not only providing higher growth prospects but also efficiency improvements across companies. Looking at the Auto sector - one of the sectors most affected by currency movements - on average more than 30% of its sales come from emerging markets. More importantly, most of the future volume growth will come from these markets. Luxury car manufacturers (mostly German) will take advantage as pricing power will remain very strong and help them to partly offset currency pressures. On top of this, emerging markets provide an opportunity to improve efficiency. Italian motorcycle manufacturer, Piaggio for example sources more than 20% of its components from emerging markets.
Nevertheless, there are some sectors where there is little companies can do to offset currency headwinds. Take the Paper sector for example, where price is set globally in USD, the cost base is in euros and there is overcapacity.
We believe the european market in 2008 will benefit from companies where there is still room to improve operations and there is a clear determination to do so such as Daimler, Siemens and Deutsche Post and where emerging markets exposure is driving profitability - such as is the case with Ramirent, Wartsila and Piaggio.
Key Points
- The negative impact of the euro strengthening has to be analysed together with companies’ ability to adapt
- Increased focus on shareholder value will be a key driver for European companies in 2008
- The presence of emerging markets provides further top line growth and incremental opportunities to improve efficiency
Jaime Ramos Martin, Manager of Standard Life Investments’ European Equity Growth Fund
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
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©2008 Standard Life Investments.
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