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Could Europe be better than we think?

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by Peter Switzer

I’m expecting 2011 to be a better year for share buyers than 2010, where on a calendar year basis the S&P/ASX 200 was down a tick over two per cent. That said I have been quick to warn that my only worry for the year is Europe and its banking as well as sovereign debt challenges.

(By the way, I don’t care much for calendar year comparisons because I pay tax on a financial year basis and during that time period the stock market was up around nine per cent per cent for the previous year and more than ten per cent for the first half of this one!)

But back to Europe.

Good omen begins?

Over the weekend I noted something that could be a good omen or a start of a trend worth watching.

Bob Pisani from CNBC on Wall Street, who I met when I was filming at the New York Stock Exchange in December, pointed out in his column that the stock market direction for the start of the year was a little screwy, given prevailing expectations.

Across Asia share prices were down with Indonesia off 8.8 per cent, India down 7.3 per cent and China 3.3 per cent weaker. However, Europe, you know the basket case EU with its debt-ravaged governments and banks, saw share prices head north!

Have a look at this:

Spain up 10.8 per cent
Italy up 10.2 per cent
Greece up 8.7 per cent
France up 6.1 per cent
Portugal up 3.9 per cent
Germany up 2.4 per cent.

The Asian story is not hard to work out with China putting on the brakes, which has knock on effects all over Asia and India too is tightening monetary policy with the central bank now toying with a 0.5 per cent rise in its official rate of interest. It happens as Indians have been surveyed and the conclusion was that double-digit inflation is in the pipeline.

On the flipside as Pisani reported: “European economies are improving and there is a perception they are moving to deal with the debt issues, particularly in the critical country of Spain.”

To the US

In the US, the Dow was up 0.7 per cent but the S&P 500 was off 0.5 per cent since the beginning of the year but this makes sense given the 23 per cent rise the S&P 500 index since August. A pullback is overdue but if earnings surprise on the high side and forecasters keep talking about economic growth for 2011 ranging from four to five per cent, then US shares could have a strong first-half for the year.

Of course, as a stock market tries to get six months ahead of reality, then that 23 per cent rise could have already factored in this US economic comeback story.

Enough money to rescue Portugal and Spain

Over to Europe and not only is Spain effectively fighting its doubters — in particular hedge funds who have been betting on a debt blow up — the head of European bail out fund has come out with market soothing comments.

I mentioned this on Friday, but let me repeat the point: this fund, which has a cool 750 billion euros in it, has been rated by the man who runs it — Klaus Regling who is the head of the European Financial Stability Facility (EFSF) — as having enough money to rescue both Portugal and Spain. Meanwhile he tells us via AAP that Greece doesn't need a debt restructuring!

"I don't want to predict now whether these countries will need money; that is not the case at the moment, they are in a position to refinance themselves on the market at the moment," Regling told Germany's Deutschlandfunk radio. "But if they were to come, then there is enough money. So there is no acute need to increase the EFSF.”

On Spain, Reuters says speculation that the country “will need a bailout has abated, but some economists say the government would be wise to apply for 100 billion euros of aid purely for the savings banks to clear up market concerns over their financial viability.”

2011 challenge

I know nothing I have written here would make you want to invest your money in any European government bond, save say Germany and possibly France, but the noises coming out of the EU are better than a year ago. And the reaction of the stock market reflects this but now the challenge for 2011 is for European officials to be more Germanic and less Latin.

If that happens then shares will do very well this year.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, January 24, 2011