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London: European equities are set for their worst June performance on record, falling more than either US or global equities, and there is worse to come.
The euro is hovering near all-time peaks against a number of major currencies ahead of the European Central Bank's policy meeting this week, at which it is almost certain to raise rates, especially with euro zone inflation at record highs.
European equity markets have fallen more than either US or global equities. The DJ Stoxx 600 is down 21 per cent so far this year, compared with a 12 per cent fall in global equities and a 13 per cent fall in the Standard & Poor's 500 index, the most widely used measure of US equity performance.
The almost unstoppable rise in the euro since late 2005 has elicited protests from several major European companies and heads of government about the erosion of regional competitiveness.
Last year, before the credit crunch unfolded, analysts said European companies had never been better placed to deal with a strong currency and their exposure to emerging economies would shield them from the effects of fluctuations past.
But the combination of a strong currency and falling global markets has been lethal for the European region, which tends to underperform world stocks in a downtrend, and investment managers say only a steep enough drop in oil and commodity prices that limits the need for rate rises will change this.
"What we've had for several months now is the worst of both worlds - a strong euro and falling markets and, lo and behold, European equities have underperformed," said Peter Lucas, global investment strategist for Ashburton.
"The bottom line is there is not a huge amount to recommend the region at the moment, based on current trends. The euro doesn't seem ready to go down, the oil price is not ready to go down and markets are generally falling. It is a disaster."
"The best one can say is the region's markets are becoming very oversold on a relative basis, so there is scope for a period of short-term outperformance, say in the next few months. But beyond that, I think it doesn't look great."
The strength of the euro hit major companies in virtually every sector in the first quarter, barring commodity stocks, which have benefited from the drop in the US currency that has boosted the value of their dollar-denominated raw materials.
The relative performance of the European stock market, as reflected by the DJ Stoxx index of the 600 top European shares compared with the MSCI index of world stocks, has moved in near-lockstep with the euro.
Now, the negative effects of a strong euro on the region's companies are set to overshadow the lure of the higher returns that a rising currency offers investors.
A monthly Reuters poll of 12 investment houses in continental Europe on Monday showed equities holdings fell in June to their lowest since July 2003.
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