The only way is up, or possibly down
Negative sentiment and the continuing macro-economic downturn continue to impact on Euro-zone equities.
“The obvious development in recent weeks has been the discomfort in the market about the uncertain levels of trading,” says Derk Brouwer, senior sales executive for institutional equities at SNS Securities in Amsterdam. He says that, while analysts are finally predicting an upward turn for semi-conductor and tech-related stocks, this isn’t the case.
“Forecasts suggest that the only way is up and that it can’t get any worse, but we are seeing the exact opposite. Warnings from major companies like Cisco and Philips points to a continuing downward trend for tech stocks. The uncertainty is causing a lot of discomfort.”
He points out that although share prices have seen some recovery, trading continues to be at diminished levels. “One problem we have noticed in the past couple of weeks is the lack of trading volumes, even though prices have gone up. And people are getting worrisome again.”
Catherine Reilly, an economist at Conventum Securities in Helsinki, feels that low liquidity and depressing market sentiment mean that caution continues to pervade the markets. “There is still uncertainty about how the economic situation in both the US and Euroland will unfold,” she says.
Technology stocks in the Finnish market are not doing so well, while value stocks continue to outperform. “The somewhat boring non-tech and old economy stocks are standing up quite nicely. This is because they did very well last year and so have very good dividend yields, which have driven their share values up, even though the dividends have now been paid.”
Paul Severin, head of equities at Capital Invest in Vienna, feels that the negative sentiment is still mainly coming from the US. “The general impact from the US will be greater than anticipated. It is perhaps a bit optimistic to view Euroland as a stand-alone economy.” He says that telecoms in particular continue to be under pressure whilst the energy sector is in a relatively positive position.
The ECB is still expected to cut interest rates some time this quarter. “Rates will probably come down by 25 basis points in June,” says Severin. “However, this won’t have a radical impact on Euroland, since it is widely anticipated and as such has already been priced in. We should be more concerned with macro-economic data and earnings predictions.”
“The interest rate trend is downward in both the US and Europe,” says Reilly. “The ECB will start lowering rates at some point during this quarter, but perhaps not as quickly as some market observers would like.”
She suggests that it is no longer logical to expect the ECB to lower rates in line with the US, since its reports suggest that it is distancing itself from structural policy. “The ECB is making a point that its mandate is to maintain price stability. Monetary policy cannot have a significant impact on the potential growth rate of an economic area. This needs to be done via deregulation of labour markets and other factors which the ECB cannot directly influence.” The view is that the growth rate of the Euro-zone area is stable at around 2–2.5% and therefore stimulative monetary policy is not needed at the moment.
Brouwer feels that people are not overly concerned about interest rates and points out the ambiguity that cuts can cause. “The Fed is due to meet again in May. An intermediate lowering by Greenspan now, though essentially a boost to the stock markets, would lead people to wonder just how bad the shape of the economy really is, since he could surely have waited a few weeks till May. One striking thing is that many Fed governors are predicting an upturn in the US economy in the second half of the year.”
The level of the euro continues to mystify analysts but is not a cause for concern.
“I’m bewildered,” says Reilly. “We consider that the euro continues to be undervalued but heaven knows when we will see it appreciate to its true value.”
But she warns against a rapid upturn. “It’s a two edge sword. Appreciation will allow room for rate cuts by the ECB, stimulating inward investment, but if it rises too fast, it could harm exports.”
Severin agrees and thinks that the euro needs to appreciate but should remain in a narrow trading band. “An appreciative trading curve would be welcomed but within a narrow range of between 85–95% to help maintain the growth differential between Euroland and the US, which at the moment favours Euroland.”
“The euro is not presenting any real problems,” says Brouwer. “It’s been coming under some pressure recently, but this is to be expected since the economy is slowing down. We are entering a test period. We have yet to see what impact warnings from big companies like Philips will have. But I don’t think there is any need for panic or concern, there’s no real recessionary pressure.”