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Europe Shares Post Steepest Annual Fall in 3 Years
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European shares rose on Friday but still recorded their biggest annual drop since the onset of the financial crisis as debt tensions in the euro zone strained the financial sector and threatened to derail a fragile economic recovery.
The FTSEurofirst 300 [.FTEU3
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] index of top European shares provisionally ended 0.8 percent higher at 1000.53 in volume at less than a quarter of the 90-day average as the UK and German markets closed early ahead of the New Year weekend.
The index fell 11.5 for the year, the most since 2008, with cyclical stocks among the worst hit as government austerity measures and a lending squeeze in the euro zone curbed economic growth and underpinned a macro-driven trading environment.
"It's a very one-dimensional market. It's hard to remember a time when it hasn't been driven by just a simple risk-on or risk-off trade," Andrew King, chief investment officer for European equities at BNP Paribas Investment Partners, said.
Euro zone banks [.SX7E
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], which have the greatest exposure to the area's troubled debt, were the worst performers, losing nearly 40 percent of their value in 12 months, followed by the growth-geared basic resources [.SXPP
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] sector, which fell 31 percent.
Britain's top share index, the FTSE [.FTSE
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], enjoyed a late rally on Friday but ended 2011 down 5.7 percent in a shortened session ahead of the New Year break, led lower by riskier assets as the threat of economic meltdown smouldered in the background.
The German DAX [.GDAXI
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] closed down nearly 15 percent for the year, although it ended the last session of 2011 in the green. German banks, a big component of the index, have been penalized for their holdings of government bonds from weaker euro zone countries.
The performance of national indexes reflected investors' desire to avoid debt-laden countries in the European periphery
![[cnbc explains]](http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/_News/_CNBC_EXPLAINS/_IMAGES/CNBC_explains_icon1.gif)
, with Italy's FTSE MIB [.FTMIB
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] closing the year down more than 25 percent.
France's CAC [.FCHI
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] ended the year more than 18 percent lower, although rallied in the last trading day of 2011.
Austerity Bites
All cyclical sectors fell heavily over the course of the year, with basic resources [.SXPP
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] and automotive stocks [.SXAP
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] down heavily. Investors have shunned these sectors as government austerity measures and a lending squeeze in the euro zone could derail a fragile world economic recovery.
"It has been a tough year, particularly for stock-picking managers, and we'll probably see more of the same in the first quarter, with a lot of uncertainty over the euro zone," said James Buckley, who helps manage 1 billion pounds at Baring Asset Management.
Italy, Europe's largest debtor, faces 100 billion euros [EUR=X
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] of bond redemptions and coupon payments by the end of April, which is likely to make investors nervous going into next year.
"However, as the year progresses hopefully we're going to have a bit of light in the darkness: I think there's every possibility that the global economy continues to grow around trend but that isn't priced in European equities," Buckley added.
Buckley has increased his exposure to oil services stocks, where it believes an engineering consultancy such as Fugro is positioned to benefit from a worldwide uptrend, driven by the United States and China.
The fund manager is "underweight" banks [.SX7P
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], citing the risk of further capital increases and the industry's inability to return cash to shareholders in current conditions.
He is cautious on consumer staples, which have already benefited from their defensive profile and exposure to consumption growth in emerging markets.
The European Food & Beverage Sector [.SX3P
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] closed the year up, led by consumer products groups such as Unilever [UN
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]
The ultra-defensive healthcare sector [.SXDP
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] also ended the year up, with German dialysis specialist Fresenius Medicare [FMCMF
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]
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