Q&A: Continental Drift

Investors have piled out of European stocks for three years, but Udo Rosendahl, head of European equities at DWS, Germany's largest mutual-fund manager, believes they'll find reason to return in 2003. He recently spoke with European Economics Correspondent David Fairlamb in Frankfurt.

Q: Why will 2003 be any better for investors in European stocks?

A: Valuations have fallen to very low levels. They look very cheap compared with bonds. Growth may not be terrific in 2003, but by focusing on companies with good bottom-line growth and sustainable profits, investors can make reasonable returns. It won't be an easy year, but it will be better than 2002.

Q: Will good corporate governance be an investment theme in 2003?

A: After the scandals of the past year, investors are looking at companies' corporate governance practices. They want clear codes and guidelines. Companies such as Nokia (NOK ) and Siemens (SI ), which take corporate governance seriously, will make attractive investments.

Q: What are the risks ahead?

A: A war in the Middle East would unsettle the market, especially if oil prices rise strongly. The uncertain political situation in Germany is a concern. If U.S. consumers draw in their horns, the global economy will slow, which would hurt many European companies.

Q: Do you expect a strong capital inflow into Europe from the U.S.?

A: We don't see a huge capital inflow to Europe this year. The average U.S. investor will continue to buy domestic equities before diversifying. But the strengthening euro should make European stocks more attractive to foreigners.

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