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Investment view

European markets have done little more than reflect the lacklustre tone of the rest of the world, says Brian Tora.

There has not been much in the way of good news emerging from Europe at present. Not only are the economic numbers nothing to write home about but confidence is taking a dive. There is nothing new in surveys painting a gloomy picture from within the eurozone but it would be nice to think the great experiment in economic engineering was about to pay dividends.

Of course, the resurgence in the price of oil has not been doing consumer or business confidence any favours. The belief that this will start to impinge upon economic growth is beginning to take hold. While economic activity has been remarkably resilient in shrugging off the earlier rises, at some stage, dearer fuel and energy costs will start to bite. We may learn to live with dearer oil but the transition process could be uncomfortable.

However, these are problems common across the industrialised world. Even Japan seems to be shrugging them aside. Europe seems to have its own special set of circumstances which are militating against an improving economic picture. Not least among these is the fact that the rules for membership of the single European currency are being significantly revised.

The fact that European Union leaders have agreed to change the basis of the Stability and Growth Pact is not encouraging. In essence, it is simply a reflection of what has been taking place. By giving EU members greater leeway in setting fiscal policy at the national level, the strains which are presently becoming visible cease to have quite the impact they otherwise would. And, of course, the Pact’s 3 per cent of GDP fiscal deficit limit and 60 per cent debt to GDP ratio are remaining as reference values.

The other factors that will now be taken into account include the cost of achieving European policy goals and those expenses which foster international solidarity. These measures are clearly a sop to the Germans, who have been saddled with high unification costs and the French, where the cost of maintaining military expenditure, ostensibly for peace keeping missions, has also produced an additional burden.

Dealing with the cost of structural reforms such as revising pension and welfare benefits helps too. Indeed, these revisions mean that those central European countries with high deficits, but undertaking pension reforms, may be able to join the Eurozone earlier than anticipated. Interestingly, last week saw Hungary cut its interest rates, perhaps conscious of the fact its currency had been appreciating against the Euro.

Despite all the gloomy news emerging from surveys, and the recognition that the Stability and Growth Pact was inoperable in its original form, European markets have done little more than reflect the lacklustre tone of the rest of the world. Opportunities remain in continental Europe, but these countries are just as dependent upon a resilient global economy as we are. Markets may have become a little bogged down as the year unfolds but not all the news is bad.

This week could be eventful for investors. Aside from the fact that the tax year has just ended – with the likelihood Isas will have suffered a disappointing sales season – we could see the announcement of the General Election. And interest rates will also come to the fore. It does not look as though spring will be particularly quiet.

This is probably a good moment for advisers to sit on the sidelines to await what emerges as the days lengthen and the weather, hopefully, improves. While the announcement of a General Election will remove some uncertainty, there are enough other variable elements in the investment mix to make a cautious approach little more than prudent. For example, will the Euro weaken now interest rates are higher in the US than in Continental Europe?

Will inflation, seemingly inevitable for those countries with capacity constraints such as the UK and the US, force further tightening of monetary policy? Only time will tell but the fun does appear to be over in the bond market for the time being. As to whether the pull-back in equity markets provides a buying opportunity – it could. There seems no rush to act prematurely though. And there will be plenty happening to give investors food for thought in the weeks ahead.


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