European Equities Monthly Update.

The Eurozone's stockmarkets and economies pulled in different directions in October. The stockmarkets were the worst-performing of all the developed markets. The FTSE Eurofirst 300 dropped 2.2%, the CAC 40, despite France posting strong economic numbers, dropped 5.4% and the German DAX fell 4.7%. In contrast, the Nikkei fell just 0.38%, while the FTSE 100 dipped 1.73% and the S&P fell 1.8%.


This weakness was more of a reflection of nerves about the global economic recovery rather than the strength or otherwise of the Eurozone. In fact, the Eurozone economies were shown to be surprisingly buoyant last month. The European Commission raised its prediction for Eurozone growth in 2010 to 0.7%, having previously been predicting a 0.1% fall.


The early findings from the Purchasing Managers' index seemed to confirm this optimism. The results showed the third month of growth and predicted a 0.9% expansion in GDP in the third quarter, a significant turnaround from the fall of 0.2% in the second quarter.


France appears to be leading the way with household and business confidence riding high. The country also showed a strong improvement in industrial production, rising 1.9% in August over July. However, this was trumped by the performance from Italy, which saw a rise of 7% over the same period. Industrial production figures were strong across the Eurozone, rising 0.9% in August over July. Eurostat also revised its July figures to show a 0.2% rise rather than a 0.3% fall.


The European Commission said that a 'double dip' was looking increasingly unlikely. The private sector is expanding at the fastest rate in two years, confidence is improving and domestic demand is rising again. The Markit purchasing managers’ index said that the improvement in French output had been largely driven by domestic demand improvements, particularly on the Government’s car scrappage scheme.


The picture was not entirely rosy, however. Eurozone economic success has been achieved on the back of huge borrowing. Not one country in the Eurozone would currently meet the original entry target of a budget deficit below 3% of GDP and the European Commission warned that the debt levels would constrain growth.


European funds still lag the average UK All Companies fund for the year to date. They have gained, on average, 15.38% since the start of the year, compared to 24.31% for the UK All Companies sector. They were hit hard in October and the performance differential widened substantially. The European Smaller Companies sector has done better, returning around 30% on average since the start of the year.