Three years on from Europe’s first bailout, is austerity working?

“The jury is still out on the European bail-out. We are yet to be convinced that the right balance has been achieved between austerity (which limits government expenditure and deficits, but can throttle overall economic growth) and more pro-growth strategies. Whilst unemployment and social unrest are high in the worst-affected areas, there are some grounds for grudging optimism – no country has been forced out of the Euro to date, and increasingly concerted and determined rhetoric has brought some of the worst-affected government bond yields down to more manageable levels.

Longer term, the effects of deleveraging and austerity will hamper economic growth in Europe, and economic advantages in other areas (such as emerging markets and the US) may well mean that Europe lags; however we can find good-value European-based companies which do business successfully in these areas. Against this backdrop, we continue to favour companies with strong market positions, which have proved over the course of time that they can maintain competitive advantage, pricing power and good returns even in difficult economic scenarios. Examples of these companies are Nestlé, the leader in coffee, chocolate and water, and Anheuser-Busch, the world’s largest brewer. The riskier cyclicals and financial stocks, although apparently cheap, could still be value traps as they will often be affected by excessive leverage, weak domestic demand and an inability to sustain pricing and returns in a downturn.”

By Dave Dudding, Manager of the Threadneedle European Select Fund