Europe Should See Better Times Soon, Some Pros Say

After soaring in 1998, European stock markets were relatively poor performers in the first half of this year. Americans investing in Europe suffered even worse, as the Continent’s new common currency, the euro, sank against the dollar.

The average Europe-focused stock mutual fund available to U.S. investors edged up just 1.6% in the second quarter and posted a 1% loss for the first half, according to Morningstar.

The average general U.S. stock fund, by contrast, rose 10.8% in the half.

Although most European markets advanced in the period--France’s market gained 15% in local currency terms, Germany’s rose 8% and Britain’s gained 7%--that was offset for U.S. investors by the 10% drop in the euro, automatically devaluing foreigners’ European assets.

Weak economic growth and worries about the Kosovo crisis helped hold markets back. Yet money managers who like European stocks keep remarking that Europe looks like the U.S. 20 years ago: A corporate restructuring and merger wave is underway, which should make companies more efficient and profitable; and many countries are reforming their pension systems, which should spark more stock market participation by individuals, just as IRA and 401(k) retirement programs have done on these shores.

Moreover, laws are being enacted to allow firms to buy back their own shares, in keeping with a trend toward greater shareholder orientation--again echoing what has happened in the United States.

Felix Rovelli, partner at Riverside International Research in New York, called the outlook for European markets “much more benign” today than at the beginning of the year.

The dollar’s strength against the euro makes European exporters more competitive--one reason why Rovelli is high on Porsche, he German luxury-car maker, 40% of whose sales are in the United States.

What’s more, Olivetti’s “unheard of” assault on Telecom Italia, in which the smaller industrial firm seized control of the government phone giant, reminded investors that things have changed for good on the Continent, Rovelli said. Europe is now the hottest takeover terrain on the globe.

He also mentioned Germany’s Mannesmann, the former steel-tubing maker that has become one of the most dynamic players in the cellular telephone industry.

Rovelli and others are enthusiastic about telecommunications in general. He likes British Telecom and Colt Telecom of England, Telefonica of Spain and Italy’s No. 2 cellular phone firm, Omnitel.

Clarkson Williams, international analyst for Pioneer Group, the Boston mutual fund firm, adds the name of Sonera Group of Finland, another up-and-coming cell phone service provider.

In general, Williams thinks the table is set for better overall performance in European markets in the second half of the year.

“We’re starting to see more consistent signs of economic growth, most importantly in Germany,” he said. Germany is not only the largest economy but also has lagged while nations such as Ireland and Spain have had soaring growth.

Another positive: Because many European pension plans are underfunded, companies are under pressure to invest more, which should improve demand for stocks.

Finally, Salomon Smith Barney equity strategist Mark Howdle says that European stocks, on average, are priced at 22 times estimated 2000 earnings per share. That’s well below the high-20s price-to-earnings ratio of the U.S. market. And Europe’s valuation is even more appealing given that European short-term interest rates are half U.S. rates, some say.

What about the euro? Henry A. (Hank) Frantzen, global chief investment officer for Federated Investors, believes the euro, at about $1.02 now, has bottomed out. If it merely holds its place against the dollar, it will be a neutral factor. But if, as Frantzen believes, it gains strength, then the translation to dollars will enhance American investors’ returns.