French short-term interest rates are 9.5 per cent against a latest annual inflation figure of 1.5 per cent. The continental recession is deepening, creating conditions similar to those in the UK in September 1992. Something has to give.
The odds are that French interest rates will have halved within 12 months, that many other European rates - probably including Germany's - will tumble, and that the main European currencies will drop heavily against the US dollar and the yen. This will stimulate economic recovery that could be quite vigorous.
European equity markets have been moving up in recent weeks in anticipation. However, they have nowhere near discounted this spectacularly favourable conjunction of circumstances. The downside is the currency risk. But with our recovery none too robust, the odds are that UK rates will go lower with continental rates, which suggests both that the UK stock market has further to climb and that any future sterling appreciation against European currencies will be modest at best.
Which shares to buy? A useful clue comes from looking at what has happened in the UK stock market since September 1992. Shares in Rover's parent, British Aerospace, have rocketed from 120p to 422p, with observers expecting them to move still higher. The inference is that the German motor giants - BMW at DM562 ( pounds 219), Daimler-Benz at DM690 and Volkswagen at DM348 - will do well after going through the mill. By all accounts, there has been a huge change in attitudes at the big three German car- makers, with transformed labour relations, a readiness to locate factories in cheaper countries if necessary, and the makings of a productivity revolution. My guess is that the shares of all three will do well, with BMW my nap selection because of the brilliant new model-development programme of recent years.
Another pointer comes from the performance of British Steel, where the shares have more than doubled since November. The two big German steelmakers are Thyssen at DM209 and Preussag at DM430. All are poised to benefit from moves by the EC to eliminate overcapacity.
A third broad area of interest is bank shares. Again, the UK experience has been that sharply lower interest rates combined with stirrings of economic recovery are a wonderful tonic for financial shares. Indeed, there are signs in both the UK and US that a golden age for banks may lie ahead. German bank shares are not a great way to play this recovery because they are stuffed with equities, making them more like industrial holding companies. Better, and riskier, bets are French giants such as Credit Lyonnais at Fr670 ( pounds 77) and BNP at Fr528. For the really adventurous, there are the Scandinavian banks that have been through traumas on a par with the UK's 1974 banking crisis. Shares to buy include Norway's Den Norske bank at Nkr22 ( pounds 2) and, in Sweden, Svenska Handelbanken at Swkrl20 ( pounds 10) and SE Banken at Swkr66.
An alternative to buying shares direct in individual companies is to go for professionally managed collective investments such as unit and investment trusts. There are more than 70 unit trusts in the European sector and they have been out of favour, with net redemptions in the quarter to June at a time when money has been pouring into many other unit trusts. A subtle argument runs that this net redemption is yet another sign that the time is ripe to buy, with sentiment towards European shares influenced by a recession which is at the darkest hour before dawn.
Investors wanting a more exciting route into Europe without the complexities of picking individual shares could go for investment trust warrants. Still on the theme that the UK's post-September stock market boom has been a dress rehearsal for what is in store on the Continent, there has been a remarkable surge in smaller company shares. This makes Thornton's Smaller European Companies Trust, launched last July and managed by experts from the German parent company, an interesting choice. Approximately three quarters of the pounds 40m fund is invested equally in smaller companies in the UK, Germany and France, with the balance in other European markets. Issued at 100p, the shares stand at 112p and the warrants - giving the right to buy the shares at 100p - at 54p. If continental European shares do follow the UK example, they could give buyers an exciting ride.Reuse content