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Benefits and Pensions MonitorThe Case For European Equity Let’s also examine Europe’s labour market. The reality is the formation of the EU and the collapse of the Soviet bloc have exerted considerable downward pressure on labour costs. Low cost labour from Eastern Bloc countries is increasingly flowing west. Ireland has a higher population than at any time in the previous 135 years, in no small part due to the influx of Eastern Europeans, who now comprise almost 20 per cent of the labour force. Similar trends have powerful effects on the economies of the UK, Spain, and the Netherlands. Workers, with their new-found mobility and more realistic attitude to the realities of competition, are having a dramatic impact on European productivity, which is improving at a faster rate than in the U.S. This implies a stronger economic performance in Europe which, when combined with the cheaper stock valuations discussed earlier, means European equity markets should outperform their U.S. counterparts. Eastern Bloc The integration of former Eastern Bloc countries is also having a positive effect on economic growth. Seeking to build their economies, these countries have created huge demands for infrastructure and services that Western Europe’s developed economies are growing to meet. For example, as Eastern Europeans become more sophisticated consumers and investors, financial services companies are growing their businesses in these markets with established products such as mortgages and credit cards. Another long-term trend supporting European investment prospects is demographic change. As in all Western countries, developed Europe is aging. However, this is a positive because continental Europeans are reducing their reliance on state pensions and contributing more to their own savings and investments. European banks, with their branch networks, have been adept in developing and selling long-term investment products and services to existing clients, growing their businesses and becoming more and more profitable. This trend will only gain momentum as time passes and this demographic shift becomes more pronounced. All these factors add up to a positive outlook for earnings and growth. Historically, earnings growth in Europe has outpaced the rest of the world. Since 1973, average annual earnings in Europe have grown by 9.3 per cent versus a world average of 8.9 per cent and a U.S. growth average of 8.7 per cent. We see no reason for this trend to change. In fact, as the EU grows, bringing in new markets, new labour, and expanded economic opportunities, investment in Europe is looking more attractive. Individual investors and corporate asset managers looking to diversify their holdings and boost their earnings should re-examine the case for European equity, which looks increasingly strong.
(Source: All index data from Thomson Datastream, using a common currency) |
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Rory Flynn is global advisor at AGF International Advisors Company Limited.