Despite the recent run of record highs across the European bourses there is no universal optimism among Euro-zone analysts for the coming months.
Pre-Christmas trading saw Frankfurt, Paris, Milan and Amsterdam at all-time highs, but the general view is that euro equities are “fairly priced”, and that the first quarter, at least, may see some flat trading. The fears that Y2K concerns would lead to markets slowing down earlier than usual this year – some analysts were predicting a November shut down – proved to be unfounded. Indeed, spurred on by the seemingly invincible Dow Jones, the equity market has seen a positive frenzy of buying to see out the old millennium.
Tomas Teetz at HSBC-Trinkhaus in Ebdon believes liquidity is the major factor affecting the zone. “Investors seem to be divided between those who are getting in prior to the year end and those waiting to see out the Y2K problems. The other interesting influence, is the sectors which are receiving the majority of this investment. Just a few stocks are driving markets up across Euroland, and these are inevitably hi-tech stocks, the internet and telecoms.”
He points out that this is an unusual situation which analysts are trying to adjust to. “We have to accept that this range of stocks is being upgraded regardless of the size of the company,” he says. “The EuroNM grouping is also responsible for a large number of influential IPOs. For example, in Germany we did not really have any media stocks now there are 15 and this is becoming an influential sector.”
Across Europe other sectors have been pretty flat, bearing out the warnings of low volume trading in the run up to the year-end, but the slack has been taken up by new-tech stocks.
David Bowers at Merrill Lynch in London is concerned about what he refers to as “the tech bubble”. “There has only been one story over the past few months and that has been the massive growth of the hi-tech stocks. What is more this story has legs and is set to run for a while yet.” He too points to the high levels of liquidity in the markets and points out the effect of the weak euro. “This is indicative of a slack monetary policy and is helping the liquidity of the equity markets.”
Teetz warns, however, that after a high liquidity start to the year, a slowdown could be around the corner. “I would expect a very strong start to the year for euro equities, as the investors who have waiting on the sidelines enter the fray. However, there is then a risk of a setback, resulting from interest rate problems. I think that by March we may well see rate hikes not only from the European Central Bank, but also in the UK and across the Atlantic.”
He is also concerned about a variation problem if the markets continue to perform strongly in the first quarter, as a result of earnings being discounted. “All in all I think it will be very difficult to maintain these record levels.”
“What is extraordinary about this development is the lack of risk aversion among investors,” says Bowers. “This could change if we experience a few Y2K problems, but at the moment the enthusiasm for this sector, which is solely responsible for the current high level of the markets, shows little sign of waning.”
He remains sceptical about developments, however. “The tech bubble is a highly unusual phenomenon, the like of which we have not really seen before. Investors must ask at some point whether these stocks really merit such a dramatic re-rating. Post-Y2K we should see a return of a healthier level of scepticism and risk aversion, and we may well discover that the world economy is stronger than anticipated.” If that is the case Bowers agrees with Teetz that there may be a tightening of monetary policy in the spring with interest rate increases around the world, heralding bad news for the equity markets.
Bowers makes the analogy of the emerging markets. “At the same time as we are seeing these stocks take off, we are seeing Russia and Latin America making a run too. It is the same kind of people who are prepared to take these risks.”
Bank Austria’s head of research in Vienna, Monica Rosen, is also concerned about the narrow base of the tech rally. “It is not only that we are looking at one sector, it is that within that sector we are only seeing a few stocks outperforming.” She has, however, a favourable view of euro equities in 2000, but warns that as neither the Dow Jones nor the Dax has managed to close at record levels, it is unlikely that this upward trend will continue for long into the new year. “We may see a slight correction, and then a broader-based recovery which would be good for the market,” she says, adding in agreement with Teetz and Bowers that an interest rate hike is possible on both sides of the Atlantic.
Ian Scott, European strategist at Lehman Brothers in London, feels that a number of indicators suggest a quieter time during 2000. He points out that there is a parity between bond yields and equity values at the moment, and with European bond yields likely to rise by as little as 0.5% this year equities should be less volatile than during 1999. He also has his own theory about cross-border equity investment flows: “These are running at high levels, and are indicative of investor sentiment. In the past it has paid to oppose these flows as when they have appeared at these levels before European equities have performed poorly over the following 12 months.”

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