The markets have at last begun to rally from the year’s lows recorded in September, but analysts already wonder if the recovery is sustainable.
“The recovery since the September lows has been really quite rapid, especially in telecoms and technology, but the markets are still plagued by uncertainty, in respect of both internal and external market fundamentals,” says Monika Rosen, head of research at Bank Austria in Vienna.
She says the potential impact of further terrorist attacks and the vote of confidence faced by Gerhard Schroder in Germany are keeping analysts guessing. “Look at the reaction to the plane crash in Queens. The markets dipped immediately, proving that another attack could unsettle them again. And though the markets are taking the political situation is Germany fairly lightly, they could dip if the outcome doesn’t suit them.” Basically, Rosen believes that the Euroland economy is heavily influenced by Germany, even if everyone is watching the US at the moment.
Michael Palmgrin, who works on the pan-European equity sales desk at Alfred Berg Finland in Helsinki, says it is still using caution with respect to equity trading.
“One could question the rise in equities in the last month, since we are not convinced that it is sustainable. We still prefer value stocks at the moment; stocks that are financially in good health with positive cash flows and earnings.” He adds that the estimates for next year are probably too high at the moment and that the markets are only discounting a recovery in the second quarter or beyond. “If traders believe there will be a clear recovery, then the recent rise in equity prices in Europe is justified. But we actually believe that earnings estimates for next year will come down, which doesn’t imply a sharp recovery.”
Rosen disagrees, believing the recovery will be V-shaped, not the U shape predicted before the 11 September attacks. “The terrorist attacks hastened and exacerbated the decline, but will also contribute to a more robust rebound,” she says.
Strategists at Merrill Lynch in London believe Euro-zone equities are undervalued and that this is welcomed by some in the markets. “Euro-zone fund managers believe that equities in their region are cheap and undervalued vis-à-vis the rest of the world and this is good news for the bull market,” says a spokesperson there.
Merrill Lynch also points out that bears can take heart, too, since telecoms and techs have both shown strong gains in the past weeks, with profit expectations rising whilst cash levels are sharply down. Palmgrin also highlights the strong performance of telecoms and tech stocks, adding that most sectors have held up well recently.
“Though we prefer value stocks, sector-wise we are going for telecoms at the moment, since not only are they coming to the end of their cycle, but they are being supported by low interest rates as well. And, overall, no sectors are doing that badly at the moment.”
Rosen feels that telecoms have been helped by the current situation in Afghanistan. “The recovery in the telecoms sector has been spurred on by the increased use of telephones and telephone conferencing, since nobody wants to travel right now.” She says that, though tech gains are mostly cyclical, they may seem to be a real bargain, since they suffered so much earlier this year.
Merrill Lynch believes that the recent hike in telecoms is at the expense of energy. “Over the last three months we have seen positive sentiment move most strongly into telecoms and away from energy.”
Palmgrin thinks that in the long term falling oil prices will help Europe’s equity market regain momentum. “For the ordinary consumer it increases confidence, especially when it shows at the petrol pump, whilst macro-economically, it eases inflationary pressure.”
He points out that Europe’s inflation levels were creeping up during he summer and this is one of the reasons the ECB has been slow in cutting rates. “The ECB is bound by the terms of the Maastricht treaty and has to keep its eye on inflation, which was a little bit too high earlier in the year.” Nonetheless, he concedes that the ECB has been slow to react to the markets’ depressed levels and has been forced to act because the Fed has been so much more aggressive.
Rosen feels that the Fed may be running out of room for manoeuvre regarding interest rates, and is pleased to see the ECB become “active” at last. “The Fed is still very aggressive but could soon run out of steam, since rates are down to 2% and, whilst we welcome the ECB’s recent cut, we are unlikely to see another cut in Europe before the end of this year. But at least they’ve finally done something,” she comments.
She believes that interest rates and hope are the only factors that can stimulate growth in the markets at the market. “In the absence of improving earnings, falling rates alongside hope are the only things the markets have, and the interest rate cycle is coming to an end, which is not a good sign. There is no apparent recovery in earnings yet.”
Things are set to improve next year, the analysts believe. Merrill Lynch goes as far as to wonder if the markets can get back to the levels achieved in 1999. “The Euro-zone economy is expected to get stronger over the coming year, but will the trend continue to the highs seen in 1999–2000?”
Rosen says she is looking for a recovery in profits and fundamentals, whilst Palmgrin predicts strong growth, especially in the context of this year’s performance. “Given how low the markets have been this year, anything will look good,” he says.

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