GOOD TIMES ROLL IN EUROPEMORE HEAT ON THE HORIZON, BUT NOT THE SIZZLE OF 1993
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January 10, 1994 12:00 AM

GOOD TIMES ROLL IN EUROPEMORE HEAT ON THE HORIZON, BUT NOT THE SIZZLE OF 1993

By Joel Chernoff
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    LONDON - Bolstered by falling interest rates, money managers expect another strong year in continental European stock markets.

    Money managers point to France and Switzerland as markets likely to prosper in 1994, while the Netherlands and Italy also win high marks.

    Still, investment experts warn the high returns seen in 1993 are not likely to be duplicated next year. Investors will have to be much more selective in their stock picks in the new year, they add.

    Since mid-September, interest rates have plunged more than 1,000 basis points in Italy, Sweden and Finland, while dropping between 200 and 350 basis points in Belgium, Germany, France and the Netherlands. The result has been soaring stock markets.

    High unemployment and weak growth prospects will cause interest rates to plunge even further next year. Sally Tennant, head of the European desk at Gartmore Investment Management PLC, London, thinks rates will fall another 200 to 250 basis points.

    But it's not clear whether rate drops will be enough to loosen purse strings and ignite Europe's dormant economies. Consumers have been shocked by the large number of layoffs still being announced throughout Europe, and are "terrified of keeping their job," Ms. Tennant said. Meanwhile, governments are overwhelmed with debt and corporations lack capital for investment, she said.

    Miranda Richards, U.K. and continental Europe strategist for Henderson Administration Group PLC, London, said elections in Italy, Germany, France and Sweden in the next two years could upset financial markets. "There will be political risk in Europe next year," she said.

    But others believe declining interest rates will make cash and bonds even less attractive than stocks, causing people to funnel money into stock markets.

    Beneficiaries from rate drops will be export-related companies and those in financial services. Here's a rundown of the expected winners:

    France

    While French stocks lagged other European markets in 1993, returning 27.22% in local currency terms according to Morgan Stanley Capital International, New York, many experts still think their promise is intact.

    While France's long-term bond rate of 6% is close to Germany's 5.8%, its underlying inflation rate is 130 basis points lower, at 2.3%, which permits further cuts in the real interest rate, noted Bernd Baur, head of international equity management at Commerz International Capital Management, Frankfurt.

    "I still think France will be a hot market," said Justin Scott, senior vice president and manager of Putnam International Trust, Boston. "There's a growing realization by the French government that it needs a better source of equity capital than the French market provides." That will cause a move out of French money market funds into stocks, and encourage an advance-funded private pension system, he said.

    French stocks favored by Putnam include: Essilor Internationale, an optical products manufacturer; Sommer Allibert, a home furnishings and plastics components maker that supplies the auto industry; and Sovac, a financial company that will benefit from falling interest rates.

    France also has lagged most of Europe in the recession, which 20

    Continued from page 19creates "an easy hunting ground to find good value," said Wilson Phillips, director, UBS International Investment London. In particular, UBS likes Club Mediterranee, the international leisure company, and food manufacturer BSN.

    Switzerland

    Moves to take the veil off of traditionally hidden Swiss financial figures, and efforts to please shareholders have made Swiss stocks a good value.

    New accounting rules "are revealing how cheap stocks are" in Switzerland, said Mark Lloyd-Price, director of Lombard Odier International Portfolio Management, London. Switzerland is "one of the cheapest markets in Europe," he said, despite its 46% rise in 1993.

    Swiss stocks sell an average of 19 times their earnings, compared with an average of 23.7 times earnings for Europe as a whole, according to Morgan Stanley Capital International, New York.

    Switzerland's lack of a manufacturing base, but the presence of large, multinational companies, particularly in finance, pharmaceuticals and food, make it an attractive market, managers said.

    Swiss bank stock earnings are up 60% to 100% this year, Mr. Lloyd-Price noted. Lombard-Odier has positions in CS Holding, Union Bank of Switzerland and Swiss Bank Corp.

    "Bank earnings probably will be up 50% next year," said Patricia Arnot, a director at Lazard Investors Ltd., London. She is especially keen on CS Holding, which she says now can cut costs after going through several mergers.

    Gartmore's Ms. Tennant and UBS' Mr. Phillips also like Asea Brown Boveri AG, which has been receiving power-plant construction contracts globally.

    The Netherlands

    John Ford, executive vice president for Rowe Price-Fleming International Inc., London, said falling interest rates and economic recovery also will boost Dutch stocks.

    He likes two specialized publishing industry stocks, Reed-Elsevier and Wolters Kluwer N.V., which are growing at between 15% and 20% a year for the long term and will sell around 16.5% times earnings next year.

    Also, Mr. Ford favors PolyGram N.V., the recording and film company, which is expanding to the United States and Southeast Asia.

    Mr. Lloyd-Price said Dutch banks and insurance companies offer very good value in terms of their price-to-earnings ratios and dividend yields.

    Italy

    The political turmoil that has beset Italy for the past 18 months may set the stage for positive financial returns. The country's efforts to deal with corruption and control its public debt may clear the way for the return of international investors, said Mark Cooke, a fund manager at Baillie Gifford & Co., Edinburgh.

    The Italian stock market is at an all-time low in relative terms, Mr. Lloyd-Price said. The question is whether one believes Italians are changing their whole society, or whether a vacuum is occurring in the political center, he said.

    Lombard-Odier thinks "the country wants to be part of the mainstream," he added, "but it will be a rocky ride." The manager likes some of the telecommunications stocks, such as STET, SIP (which is controlled by STET) and Italcable. Also, Fiat SpA is attractive following its recent rights issue, he said.

    Mr. Cooke favors Sasib, a maker of railway signaling equipment and telecommunications; CIR, the holding company of the De Benedetti group; and Marzotto, a textile and clothing manufacturer.

    19

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