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Impact Investing

IPE special report May 2018

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Euro set to make the grade

The euro has finally arrived. Such is the view of François-Xavier Chevallier of BNP Paribas in Paris, who feels that the euro has found its base and that parity with the dollar is imminently attainable, since it will become a physical currency during 2001.
“In six months’ time the euro will become a real money, as salaries will be paid in euros and the first coins will be issued,” he says. This will lead to increased trading activity in the euro and thus Euro-zone equities.
Herman Brodie of Cognitrend in Frankfurt, which undertakes equity research for Deutsche Bank, predicts that the euro will stabilise in 2001 and this will stimulate favourable equities trading. He is unsure if it will show significant gains but is no longer concerned by under-valuation. “Weakness in the euro will not cause as much pain as it did six months ago,” he says. And pressure for further decline has been eroded.
He predicts that the markets will remain clean and that the euro will be in neutral territory.
He even suggests that its weakness is justified. “We finally have the news that the euro is justifiably weak, if not correctly valued and not a lot of people know this.”
“The euro has bottomed,” says Teun Draaisma of Morgan Stanley Dean Witter in London, and will be further strengthened by the weak dollar in 2001.
“We are heading for a hard landing in the US but a soft one in Europe,” he says, in anticipation of GDP growth in the US falling from 5.3% in 2000 to between 2–2.5% in 2001 against a drop from 3% to 2.5% in Euroland. The shrinking of the growth differential is in Europe’s favour and will stimulate confidence and inward investment.
However, a dollar that is too weak always has a negative impact in Europe. “When the dollar falls below a certain point, European companies cease to be as competitive,” he states.
A weak dollar will continue to have more influence on the equity markets than a strong euro.
The NASDAQ and Neue Markt will suffer losses in the first half of 2001, says Brodie. He attributes this to the fact that investors have been holding on to long positions unnecessarily and are now wanting to sell. “People are looking for negative news from the high-tech market as an excuse to sell positions they should have sold six months ago.”
But the movement out of technology will not impact too significantly on the market overall. “This has nothing really to do with whether stocks will go up or down,” he points out.
Elsewhere he predicts stability in the markets with blue-chip stocks rallying without difficulty. “We believe the worst is behind us now for the blue-chip indices.” It is nevertheless unrealistic to expect a return to levels achieved in 2000. Despite welcoming the stability he states that “it will be some years before we see a return to the peaks of 2000”.
“Things are not looking good,” says Draaisma. “Global economic slowdown will be worse than expected”. Valuations are still not supportive of stocks and the downturn in the US particularly will impact on Euro-zone equities.
He is also worried about global profits in 2001. “Profits are going to slow down ‘big-time’,” he warns.
Euro-zone earnings achieved growth levels of 15% in 2000, but just 3% is predicted for the first half of 2001. However, estimates for big companies and for the financial sector compared to the situation a year ago are harder to make.
Analysts are calling for a correction of 15% in equity markets over the coming months compared to the levels at the end of 2000, says Draaisma.
Chevallier agrees that there will be an economic slowdown, particularly in the US, but thinks the outlook is not as bad as two years ago. “Although the current economic situation might look like we are in an air-pocket, it is not as bad as at the end of 1998 and the beginning of 1999.”
There will also be a “reshuffling of the cards in the IT sector”. This is an area that is alive and well, despite crashes in 2000. “The phoenix will rise again,” he predicts as he expects no significant change in five year earnings figures going forward, as a result of the underlying strong IT stock base.
Earnings and profits in the first six to nine months of 2001 will however decline.
Overall, market analysts are cautiously optimistic about Euro-zone equities in 2001. “But we shouldn’t be too provocative,” warns Chevallier, “it is still going to be tough, though we should see gains of 10–15% in the markets.”
Draaisma anticipates gains in interest rate sensitive sectors, such as utilities, insurance, land-line telecoms operators and domestic retail banks but TMT and cyclicals “should be avoided”.
Brodie believes that 2001 will not be influenced by interest rate movements or any inflationary pressure. “We can look forward to a rather neutral environment, where people will struggle to either buy or sell,” he says. The main factors influencing the equity markets will be profit and loss and earnings adjustments but generally he feels that “next year will be pretty boring”.
Draaisma anticipates that after a slow first half, the Euro-zone markets will make up some ground in 2001, as favourable interest rates and lower oil prices begin to have an effect. Valuations will become supportive of stocks, allowing for greater stability, he believes.

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