Newspaper article The Journal (Newcastle, England)

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Newspaper article The Journal (Newcastle, England)

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Byline: By Gary Fawcett

Recent headlines emerging from Europe have not been encouraging for the grand European project.

The NO vote by the French and Dutch has left the EU constitution in tatters and there have been calls for increased protectionism and reluctance to allow the accession of further Eastern European countries. This, coupled with sluggish growth, ballooning unemployment, a looming pension crisis and the rise of Chinese and Indian industry, must have left many feeling less than enthusiastic about the prospects for European equities.

The good news for investors is that equity markets have not been affected by recent political events, largely because they have been priced on the basis that structural reform would emerge in piecemeal fashion. The market never expected an easy road to closer political integration and is largely undeterred by the latest setback.

The key factor to bear in mind is that economic performance and stock market performance do not always go hand in hand. Despite the fact that European economic growth continues to fall behind the rest of the world, European equity returns have been similar to the US and over the longer term, better than Asia. Investors who are tempted to write off Europe should look again.

Some European firms such as BMW, Philips, BNP, NestlA and Unicredito have performed well in the face of a weak economy and a strengthening euro.

Many firms, particularly in France and Germany have undergone radical restructuring programmes and have become far more efficient. Returns on equities have been good and in sterling terms in line with UK equities, while valuations are still satisfactory. It still leaves plenty of upside for investors.

Disregarding the recent constitutional problems, what are the danger signals that investors should be monitoring?

First, evidence of real economic distress or a return to recession in a member country. …

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