EuropeanJan 3 2014

More than meets the eye

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      Investors may still be reluctant to invest their money in Europe. You wouldn’t blame them initially. And from the outset, things still don’t look good for the continent.

      We are all aware of the crisis the eurozone has been in for the past five years. It all began in December 2008, when European Union leaders agreed on a €200bn stimulus plan to boost growth in the continent after the global credit crisis. Just one year later, Greece admitted its debts had reached its highest in modern history, at €300bn. With debt reaching 113 per cent of GDP – almost double the eurozone’s 60 per cent limit – ratings agencies began to downgrade the country and its credit rating, resulting in widespread panic.

      Graphic 1 (overleaf) shows government debt as a percentage of GDP for European countries. The highest increase as a percentage is Estonia, which saw debt rise from 6.8 per cent in Q1 of 2012 to 10 per cent in Q1 of 2013. The highest debt reduction comes from Estonia’s neighbour, Latvia. The country saw debt fall from 44.2 per cent to 39.1 per cent in the same period.

      In 2010, concerns started to build over other indebted eurozone countries – Portugal, Ireland and Spain. Government bond yields rose sharply while Germany’s fell to record lows. But not even Europe’s core countries were out of the woods. In 2011, Germany and France had to agree on a bailout and throughout the year, G20 leaders struggled to find a solution to the debt crisis. Then later, France’s credit rating was downgraded in January 2012.

      But 2013 has started to see a different story. Despite the eurozone growing by just 0.1 per cent in the July to September quarter, down from 0.3 per cent on the previous three months, its unemployment rate fell for the first time since February 2011. The rate is measured across 17 countries and dropped to 12.1 per cent in October from 12.2 per cent the month before.

      Investor sentiment

      According to recent figures from the Investment Management Association (IMA), the European space – which comprises the European excluding UK, European including UK and European Smaller Companies sectors – saw net retail sales for October 2013 of £184m, an increase from the average net retail sales for the previous 12 months of £139m. In fact, the European space was the second best-selling overall. The Europe excluding UK sector was the fifth best-selling sector, with net retail sales of £197m, well above its monthly average of the previous 12 months at £83m. But European Smaller Companies funds did not fare as well, reporting £29m in outflows.

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