In what has generally been a disappointing year to date for equities in the Euro zone, the summer saw volatile trading, but little in the way of outstanding performance from any sector. The final quarter will have to show some kind of recovery if the year is not to end with a whimper, rather than the loud bang of 12 months ago.
Sharon Coombes, euro equities analyst at HSBC in London, confirms that although the summer saw flat markets, there was plenty of trading and sector rotation. “Overall the headline trend was pretty flat over the summer, but if one looks at individual sectors we see plenty of action. People moved out of TMT stocks which have performed poorly, and are back at the levels of last year. The technology sector, meanwhile, has been pretty stable, after the bubble of earlier in the year, and moved neither up nor down.”
Continuing this theme she adds that cyclicals have seen plenty of trading but performed in a lacklustre fashion, while defensive stocks have benefited from investors returning to them, and have consequently performed better than most areas of the market.
Tomas Teetz at Trinkhaus in Frankfurt agrees that the summer period saw a wide trading range, but believes that the currency market has had a strong bearing on performance. Looking ahead he takes a traditional view.
“September is usually seen as the most difficult month, and this year seems no different,” he says. “If oil prices are pegged, and come back to what we consider more reasonable levels, we should see a better environment for interest rates, and consequently a small rally in markets across the Euro-zone.”
Coombs points out, however, that there is still a feeling abroad that the European Central Bank will raise interest rates again before the end of the year. “This could have a debilitating effect on growth across Euroland, causing a slowdown.”
Indeed, she predicts that prospects for growth next year could be worse than at first thought, and that profit warnings are likely. “We also believe that the prospects for the US economy may be worse than previous predictions have suggested. The soft landing may be a little bumpier than predicted, and this will have a knock-on effect in Europe,” she warns.
Teetz believes that political influences may help the German economy next year, returning Euroland’s largest economy to the driving seat. “Tax changes which come into operation soon should have a beneficial effect on the German economy, and hopefully this will help to drive growth both in Germany, and throughout Euroland,” he says. If this is the case, then other countries considering more deregulation may be encouraged to take the plunge, he believes, and this would help growth across the region.
“I do believe there is the political will to make radical changes which will help improve the prospects for markets across Euroland in 2001.”
Mark Wall, an economist at Deutsche, believes that any perceived recovery will still be blighted by the euro and oil prices. “During the first three quarters of the year the recovery signs have been loud and clear across the Euro-zone, but the blot on this good news has been first of all, the performance of the euro, and secondly the rise in the price of oil dictated by Opec. The latter is now clearly hitting the real economy, slowing growth and slowing Euroland.” He believes growth estimates will certainly have to be downgraded, agreeing with Coombs.
He also expects the ECB to raise rates as inflationary pressures are clearly present in the economies across Euroland, as the weakness of the euro feeds through. “It is only the price of oil which may prevent a more aggressive interest rate strategy,” says Wall. Nevertheless, he confidently predicts one more hike before the year end.
At Bank Austria, Monika Rosen agrees with Wall about interest rates. “Although I would be surprised to see any rise in rates in the US, the majority of analysts expect one more rise in Euroland, with growth having peaked.”
She also agrees with her colleagues that it has been a disappointing year for stocks, but still hopes that the final quarter of the year will raise returns in Europe returns have been in single figures at best. “The US elections often give a boost to markets and earnings growth, but there is some concern about earnings in the third quarter.”
Oil prices have helped some markets such as Paris and Amsterdam, but have otherwise caused nervousness, as has the weak euro, says Rosen. One aspect of the latter is often overlooked, she claims. “It is a positive for exporters, and some sectors need to recognise this. The downside is that it continues to make bad headlines which affect confidence.”
Her recommendations are for a strong recovery in the technology sector, as well as possible improvement for pharmaceuticals. She also predicts that defensive stocks will remain popular during the last quarter. Although keener on the retail sector in the US, Rosen believes some retailers who have enjoyed a currency advantage have also done well in Euroland, but adds that the sector may be in need of consolidation. She adds that the year-end may be a good time to look at the sector.