Where to find growth in the eurozone
Nov 20, 2009
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With the cheapest European stocks having outperformed in the relief rally, it's time to move away from a pure "value" strategy, says Ronan Carr of Morgan Stanley. Past cycles suggest that a search for a combination of value, quality and growth is best at this point.
But where can you find strong growth in the eurozone?
The region's prospects are "steady but unspectacular", says Capital Economics. The recession is over, with GDP growing by 0.4% quarter-on-quarter in three months to September, weaker than America's 0.9% gain but better than the UK's, which remains in recession. But it has has done little of the heavy lifting itself; domestic demand remains subdued, with the improvement due to stronger exports.
History suggests that this is not unusual in Europe. Growth immediately out of a recession has always tended to be lacklustre at first. "Conditions for a domestic recovery are gradually coming into place" and momentum should pick up in the next few quarters.
However, the strength of international markets is likely to remain very important, which suggests you should look for European companies that have high exposure to faster-growth emerging markets such as Asia. These firms should be able to grow their revenues significantly faster than domestically orientated peers, says Carr.
The food, beverages and tobacco sector looks especially attractive; it's one of the most emerging-market-exposed sectors at 39% of sales. What's more, it offers high-quality cash generation and has enough pricing power to be a good hedge against an unexpected rise in inflation.
The big picture: big pharma pushes through price hikes
The deflation threat is apparently not a problem for drug-makers. American pharmaceutical firms have raised the price of brand-name prescription drugs by almost 9% over the last year, according to analysts at Credit Suisse; over the same period the consumer price index fell by 1.3%.
The companies say that rising research and development costs make the increase necessary. Critics claim the industry is pushing through big rises now in an effort to cancel out the effect of the $8bn-a-year cost-cutting measures they've agreed as part of the Obama adminstration's healthcare-reform plan.
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