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Impact Investing

IPE special report May 2018

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Old economy stocks back in favour

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There has been a return to trading in old economy stocks recently. This is the view of Thierry Lacraz of Pictet & Cie in Geneva. “There is now a big gap between the value of old economy and new economy stocks,” he says. Investors are beginning to return to stocks which are currently trading in a better position than new economy stocks like technology and the internet, even though these are now more attractively priced because of sharp declines in their value.
Patrick Moo of ABN Amro Bank in Amsterdam agrees that technology is not doing so well. “Tech stocks are not in favour.” He states that overall trading ranges are somewhat narrower than normal and certainly not as they were three months ago.
He also sees a return to old economy shares. “Old stocks like Unilever are now more attractive,” he says.
Moo believes that market instability is to blame for this and that, as a consequence, investors have become shy. “The attraction of old stocks and the downturn in technology has been caused largely by market volatility. This is scaring customers away.”
Lacraz points out that earnings growth in technology and telecoms stocks fell sharply because of the slowdown in the US and that Europe is more dependent on this sector because stocks like Nokia and Ericsson are dominant. “The weight of tech stocks is more important in Europe since there is a concentration of a few large stocks in this sector here. NASDAQ is made up a greater number of stocks and is therefore not so dependent on the lead players.” He says that the biggest European technology and telecoms stocks combined account for as much as 80% of the market sector’s capitalisation.
Recent evidence also suggests that Europe is becoming immune to economic developments in the US. “There is a growing feeling that Europe now relies on itself,” says Ulrich Beckmann of Deutsche Bank in
Frankfurt. He feels that Europe can now stand on its own two feet. The domestic growth component is becoming more and more important. Euroland is now considered the domestic market for Euro-zone trading. “When we talk of domestic growth we are talking about the Euro-zone.”
Moo also highlights how portfolios and indices are being altered to reflect the growing importance of Euroland as a single market. “In the Netherlands, Dutch pension funds are reducing the domestic proportion of their portfolios in favour of a larger European share.” He says that Euroland allows hassle free cross-border sector trading.
He also agrees that Europe is no longer affected by developments in the US. “In the past, when NASDAQ fell by 5%, so did Europe. That is no longer the case. European companies are focusing more on Euroland.” He believes that looking more broadly at European stocks brings more stability and reliability.
Lacraz says that it is consumer confidence that is helping Europe maintain growth. “European consumers are not so sensitive to the stock markets as their counterparts in the US,” he says. Exports, particularly of consumer and retail goods, are still relatively cheap because of the weak euro and Europe in general has not yet reached the end of the economic cycle nor experienced the excesses that the US economy has recently.
But Lacraz is still unsure of what is happening with the euro. “The position of the single currency is still unclear,” he comments. “Ideally we don’t want the exchange rate to vary too much from its current position. The euro is strong enough to attract inward investment from overseas investors whilst still sufficiently weak to keep exports competitive.”
Beckmann believes that the euro’s current weak position doesn’t justify its status.
“We see that the Europeans are doing better than the Americans but we don’t see a sufficient reflection of this in the currency cycle,” he says. But he does believe that the euro will achieve parity during 2001. Despite the effect that a stronger euro will have on exports, in the long run it will have a positive effect on monetary policy. “It will help to keep inflation in check which in turn will give the ECB the opportunity to cut interest rates.”
Lacraz believes that market visibility will be the main problem in the coming months. “We would like to know when the market will bottom out,” he says. Coupled with continued negative news from the technology sector, he expects cautious trading for the next few months, with the Federal Reserve making a possible 55 basis point interest rate cut to help stimulate the market very soon, whilst he predicts that earnings for 2001 will fall sharply compared to the end of 2000. “We expect earnings to grow by around 6-7% in 2001. In contrast, earnings growth was over 20% at the end of last year.”
Moo comments that the markets are still slow, particularly technology stocks. He predicts that large multinationals will do well, but small companies will remain vulnerable. He blames price volatility for the slowdown. “Volatile prices mean that investors are keeping away from the market, preferring instead to watch from the sidelines.”

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