Any optimism from earlier in the year when analysts were citing upward trends in Europe’s equity markets and talked, albeit cautiously, of sustained recovery has been eroded.
“We find ourselves back in the doldrums,” says Roland Lescure, director of strategy and research at CDC Ixis Asset Management in Paris.
Lescure says European market sentiment has moved on from relying on consumer and retail index performance as a gauge for identifying trends. “Earlier this year, analysts thought inflation linked to retail price indices was the only obstacle to full recovery, but that has now changed. Much more than the declines in the stock market, a deterioration in credit and credit ratings is now putting the brakes on the recovery. It is business confidence that is keeping investors out of Euro-zone markets.”
Lescure says a fall in orders, problems with company cash-flow and liquidity, and the continuing impact of Enron and Worldcom, will ensure Europe’s equity markets will find themselves caught in a vicious circle for the coming months.
“Europe, despite rallies by the euro and the ECB’s attempts to maintain stability, is being dragged down by the US, with still no viable means of protection.”
At Lehman Brothers research in London, analysts agree that consumer confidence has been superseded by business confidence. Lehman Brothers claim investors in Europe are considering whole new issues before parting with their money and all eyes are turned on corporate America where lavish executive pay packages and the ability to meet pensions obligations are now a major concern for investors.
“This naturally has a knock-on effect in Europe, where many US-based companies have extensive subsidiary networks and European companies themselves are increasingly coming under the stethoscope. New accounting practices here are revealing things which some companies would have preferred to keep hidden and pensions liabilities can no longer be considered from a long-term perspective,” says a Lehman spokesman.
He adds that this way of eyeing potential investments is unlikely to be a short-term fad. “The days of reacting to profit and earnings predictions without digging deeper are over. The way European investors approach the markets is no longer merely cautious but is evolving.”
The spokesman agrees with Lescure that Europe finds itself caught in a Catch 22 situation at the moment. “If investors are keeping out the equity markets, then they naturally can’t bounce back. Although there have been some rallies recently, it’ll be a while before real confidence returns an investors begin putting their money back into equities here.”
Stefan Scharff, an analyst at Commerzbank in Frankfurt, says this year has basically been written off but he is optimistic about recovery next year and beyond.
“There has been a flurry of activity in the last week or so among Euroland’s equity markets, spurred on by gains in the US, but by and large, investors are now looking to next year and 2004 before they see their markets really settle down and take off,” he comments.
Scharff says though some good data is filtering through continued volatility has nailed the lid on the coffin this year. “Sales were actually up in the second quarter in Europe but earnings were down. And given the massive amount of selling by traders in European equities recently, it’ll take a while to get back to former levels.”
But Scharff points out, ironically, that it is the gaps in the market left by investors getting out of their positions that will spurn on the recovery next year.
“We believe it is not unrealistic to expect gains of between 15-20% per year in Europe’s equity markers from next year. The recent selling flurry has left a huge hole that will need to be filled as normality returns. Moreover, as investors here see their markets rise by those amounts, they will be encouraged to carry on investing, so by 2004, we should be well and truly back on track.”
Commerzbank says cyclical are doing well at the moment, as are insurance companies but other financial services companies are down. Industrials and utilities are also suffering.
Luxury goods and airlines are stable. But not for long.
“Trading in major European carriers is ticking over nicely, but competition from the low-cost airline industry and the announcement that USAir may have difficulty covering its costs is threatening to bring them down again.”
Lehman Brothers says eyes will soon turn on the energy sector. “Just as Europe’s market were getting over the inflationary threat from earlier this year, then the threat of military action against Iraq could unsettle oil prices. At the moment Europe’s energy stocks are holding up but are likely to come under pressure, especially as the extent of European involvement against Iraq remains unclear.”
As for interest rates, Lesclure at CDC says the ECB has now adopted a neutral rather than restrictive stance but its impotence may again be highlighted if the Fed is forced to cut. “If Greenspan cuts US rates, the ECB may be forced to follow suit and further cuts may further damage Europe’s equity markets.”
Lehmans agrees, adding that the recent hike in the euro is another area of ambiguity for investors. Its spokesman argues the issue is no longer whether parity can be achieved, as it practically was a couple of weeks back, but what to do once it is.
“Nobody quite knew what to make of it, whether to accredit the euro or blame the dollar for parity, or how to react. Parity will probably only really become important when the markets are settled, and not volatile as they are now.”

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