Delphi’s Espen Furnes outlines expectations for the future of European markets
Espen Furnes, Norwegian manager of the Delphi Europe fund, is not expecting any positive surprises from southern Europe, but does feel that Europe overall is on its way out of the ashes.
The European Commission believes growth in the eurozone will be 0.1% in 2013. What are your expectations? And how important are the growth figures really for the stock markets?
The eurozone is currently in a recession and this may well last throughout the first half of 2013. At the same time, there’s reason to believe we will see signs of overall recovery in 2013, although these signs may be small. However, the global growth rate is what is most important for developments in Europe’s stock markets, since European companies often have a global market. The fact that the US and China are growing right now is more important than the question of whether growth in the eurozone will be slightly negative or slightly positive in 2013.
What can we expect from the major powers of Germany and France?
Germany has an export-oriented economy. Around half of its exports are sent out of the eurozone to countries such as the UK, US, China and Brazil. Germany is the individual nation that has to contribute the most in order to pull the eurozone out of its recession. Germany has a healthy economy and no acute need to make savings. France, on its part, is a more consumer-oriented economy. The French economy has been in the recovery position for a long time and will probably remain there next year too. So the most important thing in future will be to monitor the German economy.
Will any of the southern European countries be a positive surprise?
No, not in economic terms. It will be many years before the southern European countries make any meaningful contribution to the eurozone’s overall growth. Countries that spend too much money over a period of time have to save sooner or later. Naturally, this is painful in the short and medium term but it is also an important cleansing process for those economies that are most affected by the crisis. To the extent that there are any positive surprises, we believe they may be in the form of these countries making greater savings than the market expects. Not necessarily greater savings than planned, but greater than the market dares to believe in at present. The expectations here are low.
Unemployment has risen sharply in the eurozone as a result of the crisis. When can we expect an improvement?
With regard to 2013, we can probably forget about improvements. Unemployment is a lagging indicator, especially in periods of recovery. During the first phase of an economic upturn, companies are often very cautious about incurring fixed costs in the form of more employees. In addition, the rules governing the hiring of temporary employees have been softened up, which means that the expectations as to permanent hiring will also be lower in future. With marginal economic growth in 2013 and slightly better growth in 2014, I don’t think we’ll see any real improvements in the unemployment figures until 2015. As far as the stock market is concerned, unemployment does not necessarily have to fall to produce a positive effect, it only needs to stabilise. That means the situation is under control.
Can you point to challenges facing the European stock markets in 2013?
Today, the most obvious challenge is that there are few long-term investors in the stock market. This is due partly to the tough markets we’ve experienced and partly to the fact that many investors have chosen exposure to debt – the latter will to a large extent be reversed when inflation increases once again. Adaptations to new rules also mean that large pension funds and life insurance companies now have less money invested in shares. The turnover in the stock market was at a historically low level in around June/July of last year, but has risen slightly now. We expect the major investors’ ability to invest in shares to return but that this will take place gradually and over time. As far as Europe is concerned, the euro crisis is still having a negative effect on the stock markets. Many investors are avoiding the entire region due to its low GDP growth. In such case, they are at the same time forgetting that these companies have good margins and profitability and that most of the large European companies are global players that sell the lion’s share of their products outside the eurozone.