THE financial woes of some of Europe's most powerful banks might lead one to think that Europe is beset by similar economic problems to those that prevail in the US and UK.
In truth, the problems that many of Europe's financial institutions have experienced are indicative more of the global nature of the international capital markets in which they operate than of problems with the domestic economies of the core Europea
n countries – Germany and France (to which one can add Switzerland, Austria, Holland and Scandinavia). In fact these economies differ in important structural ways from the economies of the UK and US and this should make them better placed to withstand any weakness in the global economy.
Primary among these differences is the fact that the European economy was slower to emerge from the economic slowdown of the early part of this decade and asset bubbles, such as those that developed in residential housing markets in some parts of the world, have not emerged in much of Europe, with the notable exceptions of Spain and Ireland. A contributory factor to this is that, for cultural and legal reasons, residential mortgage and other consumer debt is much lower in Germany and France than it is in the UK and US. These countries have not experienced high consumer spending induced growth over the past few years but neither will they be as affected as this impetus runs out, while the fact that residential property ownership is less prevalent means any fall in prices will not have an exaggerated affect.
Beyond this, Germany, and to some extent France, have retained more of their manufacturing base and are beneficiaries of corporate and infrastructure investment in the Far East and other emerging markets, a process that will continue for many years to come. Germany also benefits from its proximity to fast-growing markets in the old eastern bloc and its companies have made use of lower labour costs in the region to expand margins.
This is not to say that European economies will be immune from an economic slowdown. Indeed, forward-looking economic surveys on business and consumer sentiment have given very mixed signals and the profitability of many European companies is suffering from the strength of the euro against most of the world's major currencies. Rising inflation is a concern and means euro interest rates are likely to rise in coming months, slowing economies notwithstanding.
Europe also contains many national markets, and Spain and Ireland have residential housing and consumer debt problems as severe as those in the UK and US. However, the large European economies are in a better position to weather a period of economic difficulty and to emerge more strongly.
European equities have performed relatively poorly over the past year, even taking into account the tailwind of euro strength. This can be explained partially by the fact that resource companies are a smaller part of European indices than the UK or US, while financials are well represented However, the fact remains that there are excellent opportunities for active managers to choose high-quality companies in relatively strong economies and we are confident that European equities will recover once the economic news improves.
• Marcus Brooks is investment director at Cornelian Asset Managers Limited
