Surprisingly good results for 1999, and the continued popularity of hi-tech stocks, meant the first quarter of 2000 continued where the last of 1999 left off.
Says Anna Mackman, European equity analyst at CSFB in London: “The general message from the Euro-zone is a strong one, but there is some concern that everything has been happening a little too quickly. Tech stocks are outperforming their global counterparts, and after the headlong blanket approach to the sector, we may see more selective investment in the future.”
In Vienna, Bank Austria’s head of research Monika Rosen says this may already be happening. “It is still not certain that we are seeing a tech correction in the US, but if I was to speculate I would say there is still some momentum left in the sector. We probably need an outside catalyst to bring NASDAQ down. The Fed may have something to say about that, but rate hikes have failed to dent investor confidence in the equity market to date.”
Mackman is concerned about prospects for interest rates in Euroland, and feels that the UK market looks more attractive in this respect. She confirms, however, that 1999 results were better than expected and that upgrades also look promising. “The main indicators look, however, as if they could roll over.”
All this could indicate a period of defensive strategy for investors, with both Rosen and Mackman suggesting that pharmaceuticals could do better, and that the financial sector could well be driven by consolidation across Europe. Nevertheless Rosen points to the continued success of the Neuer Markt ,which still has a number of attractive IPOs headed for the market.
An alternative view is offered by Mike Young, chief European portfolio strategist at Goldman Sachs. “We will continue to see market leadership from what we might call ‘the New Economy’ until the second half of 2000 and maybe beyond, in part because they are more sensitive to the world economy than many imagine.” He points out that earnings results continue to run ahead of expectations in the IT sector, and furthermore “we have continued to see upgrades in IT earnings estimates since the beginning of the year”. Young believes those expectations on earnings allow investors to support valuations that at best are a “little expensive and at worst a lot expensive”.
His view is that the earnings potential is the key to technology and that is likely to remain very positive. “The same could be said of the media sector and business services, but some of these areas, including telecoms earnings are reflecting re-rating due to internet assets these companies can show to the market,” says Young, although these new valuations will continue to support stock values into the second half of this year. “That bag of tricks is not inexhaustible, at some point it will be necessary to produce the earnings to support the valuations and market expectations.”
Nevertheless, it is his contention that the strong economy across Europe is helping the economically sensitive segments of the New Economy, and the continuing expectations that the internet will be a driver for these sectors.
Young’s favourite indicators suggest that it will be the second half of this year or the beginning of next before we see a return to more traditional blue-chip or defensive stock, and he believes this will be triggered by a peaking in the world economy. As that becomes apparent, investors will look for companies that have visible earnings and defensive sectors will be more attractive. Where the investment will go will be dictated by inflationary factors. As the rotation in inflation occurs things like traditional utilities insurance and pharmaceuticals will be more attractive. “My guess is that rotation is later this year.”

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