The stop-start, up-down scenario that has dominated Europe’s equity markets this year continued in October as the terrorist bomb blast in Bali has threatened to undermine the recent, albeit small rebound in the last couple of weeks.
“Just as with September 11 last year, the first sectors to be affected by the Bali bombing are tourism and the airline industry but there is likely to be a knock-on effect in other sectors,” says Gertrud Traud, director of institutional equities at Bankgesellschaft in Berlin.
But she adds the overall impact is unlikely to have such far-reaching consequences as the markets are probably in a better position to sustain and withhold an attack of this kind. “The initial market reaction was to be expected but unlike last year, when everyone was taken completely by surprise, the markets have been expecting, or are at least prepared psychologically, for another terrorist attack somewhere in the world. Europe’s hotel, tourism and related stocks have naturally taken a bit of a blow, but by and large this will be short-lived as the markets have more or less discounted events of this kind already in their stock prices.”
She adds that the major airlines are still reporting gains, though it is still early to speculate if these will be significantly reduced in the coming weeks. German and UK-based hotel, tourist, international leisure and related groups stand to lose the most, she says.
Overall, Traud says Europe’s markets were operating in an “expect the worst” environment anyway. “The continuing question mark hanging over military action in Iraq, the depressed state of the equity markets in general, rising oil prices, the deflationary and anticipated recessionary scenario have all been a burden Europe’s markets in recent weeks which means they are in a better position to absorb the losses the Bali attack may incur.”
In general, however, following months of bad news and dire performance, the European markets are showing signs of resilience and are set to bounce back, analysts agree. All the major indices have recovered in the last week or so, money is going back into equities and encouraging, though unspectacular, economic data coming out of the US is at last restoring investors’ confidence and giving European equity dealers something to hold onto.
But any sign of recovery, the current rally being led by financials and insurance stocks, remains fragile, say analysts, who point out that there have been shoots of recovery at various periods throughout the year but these have been quickly derailed by coincidental events.
“People have really had enough. The markets here are actually ignoring economic data coming out of the US and looking to valuations to spark trading. Things seem cheap and so the Bali attack may conversely be the spark to ignite a long-term recovery and restore investor confidence,” says Traud.
“It is great to see the indices up,” says a spokesman for Credit Lyonnais Asset Management (CLAM) in Paris. “But we have to put that in context, the indices have a long way to go to making a full recovery to the levels before September 11 2001. The CAC 40 was down almost 20% since the first anniversary of the tragedy some weeks back, whilst the Dow Jones fell by almost 10% over the same period. We remain cautious but at least things are looking up.”
He says the markets still need to show prudence when looking at “the good news”. “There are seasonal considerations such as car sales to take into account. It would be dangerous to say we are out the woods yet. Within the Eurozone, France is the only country reporting satisfactory growth of sales in consumer goods. We need to see a bit more stability than that and that’s why CLAM once again reduced its exposure to equities last month.”
Marc Breutsch, head of equity research at Swiss Life Asset Management in Zurich, says looking within Euroland, Germany is continuing to cause the region headaches and the ECB’s restrictive fiscal stance and one-size-fits-all interest rate policy is not helping the equity markets recover. “Low interest rates make a bigger difference for countries like Spain and Ireland, which traditionally had higher rates than core countries like France or Germany,” he says.
He adds that the fall in equity prices since June has triggered a slump in investor confidence across the region which is not equally reflected in real economic data and he fears a double-dip. “Germany’s IFO business survey in particular has posted its third decline in a row.”
However, he points out that Europe’s consumers play a larger part in economic expansion than their US counterparts who are more affected by declines in equity trading. “European consumers are less dependent on equity wealth and, given that discussions about general price increases incurred since the introduction of the euro are fading, they are contributing more directly, albeit moderately, to economic expansion.”
Overall, Swiss Life says that earning revisions across the Euro area are continuing their downward trend and the equity markets won’t be helped by the ECB’s refusal to change policy but could be helped by the latest earnings yield models that indicate the markets are back in buying territory.
“Things really can’t get any worse. The markets have had plenty of time to adjust to the possible impact of military conflict in Iraq and the only thing holding then up at the moment is the next wave of earnings forecasts due out in the US, particularly among tech stocks. Whilst we are still in negative territory, we may be just about to turn the corner,” says Traud at Bankgesellschaft.