Newsletters & Commentary
Europe on the right path
January 27, 2021
January 27, 2014
Dear clients and colleagues,
We recently had a chance to meet with over 40 companies based in Germany and France. Here are some thoughts on the two biggest European countries and our views for 2014.
The main topics of discussion in France remain on how they can stimulate their job market and economy while engaging in much needed reforms. The government is now accelerating measures to improve France’s competitiveness and tackle its fiscal deficit. President Hollande just announced that €30 Billion in employer contributions for family allowances will be eliminated by 2017. There is also a strong willingness to streamline business regulations and bureaucracies to support the manufacturing sector.
Regarding fiscal issues, France is committed to cut public spending by €50 Billion between 2015 and 2017, on top of an additional €15 Billion for this year. France has little room to maneuver and finally politicians have realized the importance of reforms. Let’s hope that these announcements will translate into real actions sometime soon.
Germany’s strong economic performance should remain intact for 2014. The German model, which relies on leading edge technology to produce highly desirable products, should continue to deliver good performance overall. Automotive, Cap goods and Technology companies should do especially well. Despite the currency headwinds that German exporters are facing, most companies expect to maintain or increase their operating margins. One reason being that companies remain very much focused on bringing down their cost base. Even 5 years after the financial crises, rigorous restructuring programs are still on the agenda. Finally, we feel like the introduction of a minimum wage by 2015 and an increase in workers benefits would stimulate domestic consumption.
We see growth accelerating in 2014 but at very slow pace. In this context of anemic growth, we anticipate small caps to outperform their larger counterparts. In our view, European stocks offer better margins expansion and thus, more re-ratings potential than most other regions. Europe in general remains under-owned in many portfolios and we anticipate a gradual capital inflow to the region.
Balance sheets at corporate levels are sound and most of the deleveraging has been done. Corporate leverage is approaching its bottom level of 1995-1997 when the net debt to capital was around 40%.
Healthy balance sheets and an improvement in business sentiment could trigger an acceleration of M&A activities. A potential pick-up in M&A, even a small one, would be very beneficial for smaller companies. Keep in mind that more than 96% of all deals come from companies with less than 5 Billon dollars in market cap.
The Global Alpha Team
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