The recent terrorist attack and ensuing tragedy in New York have caused further deterioration of an already depressed equity market in Europe.
“We are now certain that there will be a recession in the US which will have a direct knock-on effect on Eurozone markets,” says Peter Nethe, a strategist at Theodoor Gilissen Bankiers in Amsterdam. He believes that Euroland could be plunged into recession as well, despite some small signs of recovery before the disaster. “The anticipated recovery in economic growth in the major markets has now been set back. It could now be as long as six months before we see any real changes.”
Chris Stacey, investment director at JP Morgan Fleming Asset Management in London, points to the equity markets ignoring interest rate cuts as a major reason for the continued depression in the markets. “The fact that equity markets ignored both US and particularly European interest rate cuts indicates the extent to which the original US economic slowdown has evolved into a synchronised global slowdown.” He says that indices are down and technology stocks continue to take the brunt as a result of high profile downgrades. “There is essentially nowhere to hide.”
A spokesperson for Deutsche Bank research in Frankfurt feels, however, that even if the events in New York have somewhat overshadowed the usual economic events, the ensuing military action by the US could be a catalyst for economic rebound. “Monetary expansion and the spending incurred by the military build up could help the US turn around which in turn will knee-jerk trading and consumer confidence in Europe.”
Nethe agrees, pointing out that IT and technology stocks could do well, as modern military campaigns tend to be high-tech and computer driven. “IT and tech stocks could get the boost they have been desperately looking for practically all year,” he says.
But that is wishful, forward thinking, according to Stacey, who says that early gains in the past few weeks posted by technology and telecom stocks, led by Nokia suggesting that its third quarter revenue forecasts would be met, disappeared as news of the tragedy in New York unfolded.
“Technology and telecoms stocks had been supported early on that week by a wave of buying from traders wishing to cover short positions in those sectors, but that soon changed.”
Moreover, he suggests that the markets didn’t react too well either, to news that second quarter GDP figures for France showed a further slowdown in Euroland’s second largest economy and that Germany’s DAX index had fallen to a three year low.
“There has been little or no comfort from current trading statements and investors will almost certainly want to study pre-announcements in the coming weeks before making any aggressive commitments to equities,’ he comments.
But not all the analysts are this pessimistic, as Nethe believes a sense of ‘normality’ will return to the markets once the situation calms down. “Maybe in the short term people are getting out of equity positions, but once things are more stable, they will return to the equity markets.”
He suggests that this will be helped by the increased liquidity in the markets that the recent interest rate cuts have induced. “The ECB, and indeed other global monetary bodies have tried to ease the situation by cutting rates and pumping money into otherwise dry markets.”
However, he underlines the long term implications for the way portfolios are composed and the sense of unease many investors are displaying. “The appetite for risk has definitely changed. The future will probably see people taking less risk and diversifying their portfolios.”
He stresses that we are unlikely to see the high valuations in the equity markets of recent years, but this was somewhat anticipated anyway. “This isn’t the start of a long drawn out recession,” he adds.
Deutsche Bank research echoes this feeling. “Given the level of war tension that is building, we could see a return to risk premiums that we thought had gone with the cold war,” says their spokesperson. He feels reviews of long term asset allocation strategies with substantial movements out of equities into government bonds, are highly probable.
Even the oil sector, initially a winner when the tragedy struck, is coming under pressure. “People flocked to oil initially, but that has changed drastically since the markets reopened in the US, as investors realised that economic growth wasn’t going to be as strong as predicted,” says Nethe. He points out that Royal Dutch Shell, having said it would increase its daily production, has returned to its pre-attack levels.
Deutsche Bank believes, however, that there is a medium term risk to the price of oil, as current levels will be difficult to maintain in light of the increasing likelihood of American military action in the Middle East. This could stimulate inflationary pressure across Euroland and keep consumer confidence down. In addition, the ECB’s reluctance to act to curb inflation will further exacerbate the situation.
The knock on effect of the terrorist attack underlines how dependent on developments in the US Europe’s equity markets still are, according to Nethe. “The airline, leisure and hotel industries are obvious victims, and we still can’t speculate to what extent, but so is insurance, where companies such as ING, who have very little interest in the States, have been hit badly.”