Europe: Sluggish Economies, Hot Stocks

After three years of tumbling stock markets and sluggish economic growth, European investors finally have something to cheer about. Although the Continent continues to trail the U.S. and Asia when it comes to growth, it is also home to some of the most promising stock plays. Ronald Holt, chief investment officer at money manager Hansberger Global Investors in Fort Lauderdale, notes that Europe is ``awash with corporate restructuring possibilities'' that can result in investor profits.

Two examples that many investment professionals point to: ABB, the Swiss engineering group, and financial giant Credit Suisse Group. Both have taken a scalpel to costs, off-loaded loss-making businesses, and are staging robust recoveries. ABB's new management plans to slash $900 million a year in costs over the next several years. In the first half of 2003 alone, it cut some 6,000 staffers. Yet orders increased by 6%, and revenues by 12% in the period. Credit Suisse sold off several noncore operations, such as British insurer Churchill, and let go more than 7,500 employees over the past two years. Costs in the second quarter fell 23% from 2002 levels.

Other promising restructuring bets include Dutch conglomerate Akzo Nobel, whose industrial coatings division is benefiting from improving global demand, and German chemicals giant BASF. Restructured companies are able to rebuild their businesses off much stronger bases. ``That means there's potential for a strong recovery in earnings, especially next year,'' says Udo Rosendahl, a fund manager at Frankfurt's DWS.

The corporate-recovery story has helped spark a marked improvement in European equity markets. Germany's DAX, which is down 72% from its all-time high of Mar. 7, 2000, has gained 21% since the start of the year. Spain's Ibex 35 has jumped 19%. ``Investors are buying because the geopolitical situation has improved, companies have restructured, interest rates have fallen, and the U.S. economy is stronger,'' says Hans Beth, a capital markets analyst at Landesbank Rheinland-Pfalz in Mainz.

Corporate restructuring isn't the only game in euro land. Exporters also are poised for above-average profit growth. Money managers expect both Sweden's Ericsson and Finland's Nokia Corp. to benefit from strong Asian demand for mobile telephones. Dutch electronics giant Philips and its German competitor Siemens, both of which have disappointed investors recently, are likewise well positioned for export growth as cost-cuts have made their products more globally competitive.

Then there's French turbine maker Schneider Electric, which, along with ABB, could benefit from increased U.S. infrastructure spending in the wake of the blackout that hit the Northeastern U.S. and Canada on Aug. 14-15. In Britain, Rolls-Royce looks set to shine because demand for its airplane engines is stronger than forecast. Given the company's relatively modest price-earnings ratio of 17.4 and attractive 2.7% yield, it should win over international investors.

But exports will provide only a temporary boost for Europe. The euro, pound, and Swiss franc look set to strengthen against the U.S. dollar again later this year, which will make European exports more expensive. The outlook is rosier for domestically focused companies, including giant retail chains such as Germany's Metro, food groups such as France's Danone, and manufacturers of consumer goods. They should also benefit from tax cuts in Germany, France, and several other countries, which will stimulate stronger consumption.

Given the fragility of the European economy, buyers are wary. ``I'm very cautious,'' says José Alzola, euro-zone economist at Citigroup in London. ``The worst is over, but we are not looking for a boom.'' Indeed, the thinking in Europe's financial centers is that equities will tread water for the rest of this year before heading higher in 2004. So to make your investment pay, choose wisely.

By David Fairlamb in Frankfurt with Laura Cohn in London

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