Austerity keeping

Growth at Bay!

Three years after the realisation that certain countries in the European Union had fiscal balances that were unsustainable, a lack of economic growth has caused many to question whether austerity was theright medicine to cure the ills of the region’s most indebted nations. While reducing spending is an important step towards fiscal balance, European authorities are beginning to acknowledge that it may be ineffective to do so at the expense of economic growth.

In 2010 the Troika, of the European Commission, ECB and the IMF, provided funding to help certain countries including Spain & Italy to avoid default. This assistance came with the stipulation that governments would impose strict austerity measures in an effort to curb government spending. Three years on, the European public has expressed its discontent with austerity, with protests staged across the region, and policymakers are recognising that austerity alone is unlikely to lead Europe out of recession.

While it will take time for Europe to emerge from recession, the European equity market should continue to provide attractive investment opportunities. The ECB’s monetary policy is likely to remain accommodative, and many European companies have global revenue streams, allowing them to continue generating revenue despite weak domestic growth. European equities are attractively valued and, on average, pay higher dividends than other developed companies, particularly in the US.

STERLING AGAINST THE EURO

The Battle Continues in 2013 

One common question is to comment on currency FX and what we see ahead for sterling in particular.

So far this year sterling has fallen against the euro from the turn of the year at 1.22 dropping to 1.14 before Easter to be sitting now around the 1.18 mark.

The value of these two currencies will vary depending on market confidence behind the strength or perceived weakness of the UK and European economies.

In Europe, economic confidence is low, interest rates have dropped again and comments from the European Central Bank suggesting that negative interest rates are not inconceivable in an aid to boost the Eurozone economy have seen the euro falter.

In contrast a recent pick up in the UK economy has lessened the chance of further monetary easing and asset purchases in the near term by the Bank of England leading to strength behind the economy and the currency itself.

We would suggest caution during 2013 over which currency will prove the stronger and that any individual investing for income and looking for better returns should take practical, professional advice before making any decisions.

We will continue to update you in our regular feature on Foreign Currency.