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More questions than answers

With over E20bn worth of corporate bonds being issued by some of Europe’s top companies in the last couple of weeks, some analysts are undecided whether this signals a return to optimism in the equity markets, with the risk aversion strategies of 2002 coming under scrutiny, or desperation to raise cash and remain liquid. However, others clearly blame the issuances on continued volatility and uncertainty, claiming if the equity markets are ready to show real recovery, there is no need for companies to attract investors by issuing bonds.
“There are two main themes we consider to be crucial at the moment having an influence on the euro area’s equity markets,” says Peter Dixon of Commerzbank Research in Frankfurt and London. “One is the weakness of consumers in the US in the near term and the other is industrial output in the Euro-zone”.
However, Commerzbank doesn’t expect the solid output figures posted by the major European economies, particularly Germany and France to be the precursors of a rapid recovery, since overall market indicators still fail to point to a decisive pick-up across the region. “And the problem in the US stems from strong production figures pitted against weak consumption. Producers are rebuilding their inventories but people aren’t buying as much as before,” says Dixon, adding this has a knock-on effect in Europe.
“It’s a shame to see that Euroland’s equity markets, having begun the year on a very positive note, have started dropping back again as overall economic data has failed to excite the markets and the recently announced fiscal package in the US is more or less what was expected,” says Dixon, who believes European investors are more risk averse than their US counterparts as a large proportion rolled over their hedge positions as the New Year began. “This means we could see another sudden, if not violent, rise in European equity trading, but this won’t be indicative of the general economic situation rising at the same time.”
Commerzbank is also optimistic that Euroland’s anchor economy, Germany, is out of the woods and will begin to develop positively from the second quarter on. “Germany’s performance last year left a lot to be desired and Europe, already depressed because of the global slowdown, could have done without this,” says Ralph Solveen at the Frankfurt-based German research team. “However, the problems currently besetting the German market – falling equity prices, the appreciation of the euro and the continued uncertainty over military action in the Middle East – should start to fade gradually during 2003. Whilst not as important an influence as developments in the US, Euroland can only expect to benefit,” he explains.
Analysts at Jupiter in London believe that Europe continues to offer significant investment opportunities despite the fact that the general economic performance and the equity markets in the region are disappointing. “Success in Europe will come from focusing on investment at stock level,” says a spokesman there. “We anticipate a bias towards companies with strong, recurrent cash flows protected by a solid corporate structure and business. Moreover, as a result of three years of declines posted by European stock markets, valuations are now even more attractive.”
According to Jupiter and contrary to what Commerzbank suggests, industrial output across Europe is still declining, held down by low internal demand and a weak export market. “There is still little evidence of any political willingness to tackle structural issues in Europe and this is added pressure on her equity markets,” says the spokesman there.
Overall, Jupiter says that at stock level, TMT and tech stocks are no longer underperforming but the slowdown in the Euroland economy as a whole is still spreading to more or less all sectors. “Insurance companies, industrial goods and German consumer stocks are being particularly badly hit and we shouldn’t forget that the gains in TMT stocks reflect more the depth of their decline than a real improvement in the underlying companies’ earnings prospects,” says Jupiter.
At CDC IXIS Asset Management (CIAM) in Paris, researchers don’t think the Bush administration’s recent proposals to kick-start the equity markets globally by suppressing taxation on dividends will have a long-term impact in Europe. Despite a favourable effect on valuations, CIAM claims investors and shareholders in Europe will only see the immediate gains and profits at a time when the markets are crying out for longer-term support at political level.
Moreover, CIAM believes short-term boosts can have the perverse effect that shareholders’ interests could become incompatible with companies’ long-term profit and investment strategies, leading to further declines in productivity and growth.
Europe’s equity markets are also being hampered by the current monetary and fiscal policy of the ECB, claims CIAM, with the effects of the recent cut in the short-term rates being cancelled out by the continued appreciation of the euro. CIAM says the ECB’s neutral stance in this area and insistence on allowing the euro to appreciate yet further is holding back chances of real recovery in the industrial sector as well as hindering the export market. Moreover, the tightening of fiscal policy in the US and the recent hikes in the price of oil are only adding to the general uncertainty that continues to pervade Europe’s equity markets. CIAM believes one solution to Europe’s current problems would be the dollar /euro exchange rate redressing itself to the levels it was a year ago.

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