Euroland’s equity markets are gearing up for what analysts expect will be an unhindered recovery and sustained period of growth.
“Finally things are looking good for investors, especially given the continuous sensitive nature with which investors have been approaching Europe’s markets vis-à-vis risk strategies for the last 18 months or so,” says Jean-Baptiste De Gorostarzu, European equity manager at Credit Lyonnais Asset Management (CLAM) in Paris. He says that trading in the past couple of weeks has picked up and the unusual events of 2001 – the 11 September attacks and Enron – are more or less behind us.
“Those events, even if we do still perceive a touch of uncertainty among investors here, coupled with the fact that we’ve reached the end of the cycle anyway means our outlook is very positive at the moment. It’s great to see the turnaround.” However, CLAM remains cautious about the levels European equity markets can reach, given investors’ doubts over Germany’s ability to reduce its budgetary deficit.
Patrick Moo, an equity risk manager at ABN Amro, agrees that the worst is finally over and that investors are beginning to show renewed interest in Euro-zone equity markets. “The main European indices appear to be breaking through the important psychological barrier that would suggest we are finally in recovery scenario. Investors, particularly North American-based ones, are returning to the equity markets this side of the Atlantic,” he comments.
Moo adds that the recovery can now be looked at in broad terms. “Trading volumes in all sectors are up and private investors as well as institutionals are placing their money here. In broad terms we can honestly say that market sentiment is good.”
Nonetheless, Moo believes that the positive impact of the current trading environment probably won’t be felt until much later in the year. “Companies are making good earnings and profits predictions and good general economic data both here and in the US are encouraging. But realistically we are looking at the last quarter of the year before we see the major long-term effects of the recovery in Europe.”
Moo suggests that the only slip-up now is likely to come from the Middle East. “There’s nothing spectacular affecting Euroland’s markets at the moment, but renewed military action in the Middle East could bring us back down again.”
Analysts at Swiss Life Asset Management in Zurich believe corporate earnings revisions are now the main driving force behind the recovery in Europe’s equity markets. “The pace of downward earnings revisions has clearly slowed among European companies and is now concentrated in 2001,” says a spokesman, adding that valuations are more reasonable in Europe than in the US, but not spectacularly so.
“Valuations are definitely more reasonable in Europe than in the US but nothing really to get excited about.” Overall, however, Swiss Life is sticking to its long-term view that Euroland’s recovery is still patchy and mild at best. “We see different sources of growth in the various Euro-zone economies. With elections due in Germany, France and the Netherlands, government spending is expected to be significant in these countries.
“When a synchronous recovery of the global economy steps in later this year, exports should help the Netherlands and Germany in particular whilst consumer spending will be highest in France and Italy. The problem is that it is hard to see where investors will go in Europe and the extent the elections influence their decisions,” the spokesman says.
Sector-wise, Moo says that all sectors across Euroland are doing well at the moment, though tech stocks are still something of a mixed bag. “Some tech companies are basically broke and investors are shying away from them.”
De Gorostarzu says that looking at the markets sector-wide isn’t always the best way to gauge how they’re doing. “Sometimes good sector performance belies the performance of individual stocks. This is the case in some European sectors at the moment.”
CLAM doesn’t think the European Central Bank will cut rates again until the current wage negotiations across its region are concluded and De Gorostarzu questions the impact of rate cuts. “The rate cuts we saw last year that were designed to support the markets weren’t that successful anyway, especially when you consider that they had very little impact in preventing profit warnings or stabilising the markets here,” he says.
Moreover, CLAM claims that the current positive economic data means that the ECB doesn’t need to cut rates anymore now and even predicts two 25-basis-point increases in the second quarter of this year to bring them back up to “normal” levels.
Moo agrees that rates in Europe are likely to rise as the markets take off. “The cutting days are over, and Euroland’s equity markets are now ready to sustain one or two small increases, making them naturally more attractive to investors,” he comments.
Swiss Life believes there is room for another cut, but it is unlikely to happen. “All the indicators point to Europe’s equity markets being in a position to recover without the need for further cuts,” says the spokesman, who agrees that a rise or two now would add stimulus to export markets and encourage inward investment.