The hi-tech revolution continues to be a major influence in the Euroland, along with the accompanying increase in retail investment, making for unbalanced markets across the continent.
“The retail rush into new technology, and the effect on valuation has worried institutional investors,” says Gerry Raybould at Credit Lyonnais Euro Securities. “Even so, the institutions have had to follow into these stocks, at least where it has been possible to get in at normal unit size.
“They remain worried about valuations, however, and really wonder whether they should be in there with their retail cousins.”
Raybould points out however, that the increasing valuation means more liquidity, and that institutions become less nervous the more they can play the paper. He believes that the last month has seen some of the more volatile stocks topping off. “In some instances prices spiked up to such an extent that owners were coming out, and eventually supply and demand levelled off.”
The activity of the retail investor is having an effect on the market, claims Raybould. “The retail investor is here to stay, and this should be good for growth,” he says. “Interestingly, sales managers are writing record numbers of tickets, but I doubt if they have ever written so many small ones, even from the institutions.” What is evident, he says, is that the new retail investor is happy to re-invest his profits.
Although Paris is a fairly balanced market, Germany has suffered because traditional blue chip stocks have not performed as well as expected, given the value to be found in them. This has left the German market dominated by six or seven stocks. Similarly the telecoms sector dominates in Spain, and makes up virtually the entire activity of the Finnish exchange.
Raybould believes that we are witnessing a kind of trickle down, with investors taking profits and looking at companies lower down the technology chain. “There have been good profits made in companies which are restructuring and in which technological advances are being incorporated,” he says. “One of the questions now is whether people will look at deep cyclicals and defensive stocks. Certainly institutional investors will continue to look for value, but that does not mean the tech rally will not go on for a while yet.”
There seems little evidence of a parallel recovery, and Raybould believes that any cyclical rally may be running a little behind. James Barty at Dresdner Kleinwort Benson agrees that defensive and cyclicals stocks are having a bad year. “Traditional areas such as pharmaceuticals, food and beverage are well down this year. In February we saw some hints that defensive stocks may be coming back into fashion. People have hinted at balancing their portfolios by taking some profits and going back into financial services.”
He confirms, however, that the market remains very volatile, with media, technology and telecoms continuing to outperform. “Nevertheless, the market is not being driven forward,” he adds. “This year as a whole we are seeing flat markets, or even slight losses. It may be because of worries about rate hikes across Euroland, which have seen bond yields under pressure, following a recovery in the US bond market. Even so, investors are not too concerned at the moment.”
Chase H & Q’s Peter Misek agrees that the general trend for interest rates will be upwards, tracking events in the US. “We do not see this as a problem for the hi-tech stocks which are performing so well, as these are long-termpositions,” he said.
One sector which may be subject to a re-rating is the energy sector, and oil companies in particular. With an OPEC meeting taking place later this month, there are hopes that supply will increase, with the resultant drop in prices back towards $20 per barrel by the end of the year. “That will probably be the scenario,” says Barty. But warns “If that is not the case there is a strong argument for re-rating the oil company stocks. The higher price of oil has not been reflected in profits and the price of shares.” But Misek sees technological developments continuing to drive the hi-tech stocks over the coming months.“ Kevin Hall