European Equities look to continue gains in 2010

Positive data towards the end of last month suggested the eurozone may maintain economic momentum, having moved out of recession in the third quarter. Even Ireland, one of the hardest hit of the eurozone economies, managed to drag itself into positive territory, rising 0.3% in the third quarter.

There was plenty of grand talk among Europe’s laggard economies of sharp cuts in spending. The governments of Spain and Ireland both announced wide-reaching cuts to address their deficits, while a team of EU enforcers headed to Greece to check on the credibility of its austerity plans. Delivering on their promises may prove crucial in 2010.

Eurozone inflation began to rise again during the month with consumer prices up 0.5% in the year to November. This had been widely expected and was welcome news for the European Central Bank, suggesting further stimulus may not be necessary to avoid deflation.

Private sector spending in both manufacturing and services rose at its fastest rate for two years, while the Purchasing Managers index reached its highest level since October 2007. The rate of job losses slowed, bringing some welcome respite for policymakers.

But the month was not without its problems. The crisis in Greece looked set to test the credibility of the union to its limits. Fitch downgraded the country’s credit rating, while S&P revised its outlook for Spain from ‘stable’ to ‘negative’. There were also ongoing worries about the exposure of Austrian banks to bad debts in Eastern Europe.

Austerity measures remain a concern for countries whose citizens rely on a strong public sector with predictions of civil unrest as spending cuts hit home. German industrial production figures slowed on weaker consumer demand and the Bundesbank warned the recovery may have lost momentum. Much of this weakness came from the ending of the car subsidy scheme, but it gave analysts pause for thought.

However, the eurozone’s stockmarkets were undeterred and were among the top performers of the developed markets. The FTSE Eurofirst index ticked up 6.1% over the month and rose 22% for the full year, leaving it ahead of the FTSE 100 and S&P 500. The individual markets of France and Germany were weaker, both for the month and for the full year. The CAC 40 rose 5.81%, while the Dax rose 5.3%. The CAC in particular has lagged UK and US markets in spite of France’s relatively strong economic performance.

European funds lagged the UK All Companies sector by 11.5% for the full year, delivering an average return of 19.46%. This was in line with US funds and well ahead of Japanese funds, which dipped 3.1%. That said, European funds have yet to reflect the superior performance of the larger eurozone economies and they will be hoping to catch up in 2010.



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