European stocks perform strongly during September

The MSCI Europe ex-UK index rose 4.8% over the month and by 6.6% during the third quarter of 2010.

Across the Continent as a whole, medium-sized and smaller companies performed particularly well, suggesting investors became somewhat less averse to risk during the month amid increased optimism the global economic recovery is stabilising.According to data released by the Investment Management Association during the month, demand for funds in the European Smaller Companies sector proved slightly more popular during August than the mainstream Europe excluding UK sector.

Nevertheless, the positions of some individual countries within Europe continue to appear less than solid, and Europe continues to look like a region of two halves. At one end of the spectrum, Ireland and Greece performed particularly poorly during September while, at the other, countries within the Nordic region made strong gains. France and Germany also posted strong performances – the former’s CAC 40 index rose 6.4% during the month, while the DAX index rose 5.1%.

Germany in particular appears increasingly robust. Consumer confidence rose to its highest level in almost three years during September, while business confidence reached levels not seen for more than three years, boosting confidence in the resilience of Germany’s companies. Unemployment did fall by more than expected during September in Germany but remained stable at 10.1% in the eurozone as a whole.

In sharp contrast, some countries within the region continue to appear far from stable. Greece’s economy contracted by 1.8% during the second quarter, and Moody’s Investors Service reduced Spain’s credit rating from AA1 to Aaa, highlighting the country’s weak economic position.

In Ireland, the banking sector continued to absorb headlines, and the country’s government announced plans to take majority ownership of the troubled Allied Irish Banks. Meanwhile, Ireland’s finance ministry announced Anglo Irish Bank – described as “our country’s most distressed institution – is to be divided into a “Funding Bank” and an “Asset Recovery Bank”. The latter will subsequently be sold in its entirety, or its assets run off over a period of time. The International Monetary Fund has said the measures announced by the Irish government are “appropriate and the right thing to do”.

Elsewhere, consumer spending fell in France during August as consumers reined in their expenditure amid expectations of budget cuts and plans to raise the country’s retirement age. Consumer spending declined by 1.6% during August, having risen by 2.7% during July.

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