With the summer lull looming across Euroland, it is time to reflect on the background against which trading will be taking place over the next couple of months.
As usual the US economy has cast a large shadow, causing continued uncertainty over interest rates. On top of that worries about the correct Euro-dollar rate, which has been difficult to call all year, is making trends difficult to spot. Obviously the first quarter was dominated by the TMT sector, but as that faded away it was followed by a series of jitters; the collapse of Boo.com, the Lastminute. com fiasco and lately worries about Amazon.
Simon Robinson at Capel Cure Sharp expects summer trading to be slow across Europe. “It’s hard to find anything to get too excited about at the moment,” he says. “Obviously the main trend which could stir a little excitement is acquisitions and mergers, particularly in the telecoms industry. The Vodafone-Mannesmann deal set the standard, and we have recently seen France Telecom and Deutsche Telecom making some acquisitions, but I doubt if that is the end of it. Perhaps more interesting was the failed deal between Telefonica and KPN, which would have been the first merger between two former state-owned companies, which probably fell through for that reason.“That would have been a very significant deal, since Euroland is still dominated by political restraint.”
In manufacturing, Robinson suggests keeping an eye on companies which are attempting to combine new and old economies, providing services as well as traditional manufacturing. He also expects financials to be quiet, with the possible exception of Germany, where Commerzbank are keen to build up their investment banking side. Given the flood of departures at DKB after the Deutsche fiasco, however, any merger will prove very delicate.
Gerry Raybould at Credit Lyonnais Euro Securities believes that we will see July/August develop parallel to the previous two months. “At the end of spring, a lot of funds increased their cash position to a point where they were a little longer in cash than they would be comfortable with. That was because of some of the valuation in the TMT sector. That cash has been quite active, however, in modestly-sized IPOs for a few weeks at a time switching from one IPO to another.”
He also believes that pension funds are happy that the TMT sector has had some of the strength taken out, and that although there has been some movement towards cyclicals and defensive positions, it has not been particularly significant. “This suggests that these fund managers have not been any more active this year than any other year, despite the impression which may have been given.”
What this does mean is that, to a certain extent, some sectors have become marginalised: financials affected by interest rate worries, manufacturing by the strength of the Euro and pharmaceuticals because of worries about the Medicare debate in the US during election year. “This means that day-to-day volatility in pricing is quite extreme,” says Raybould, “but it is noticeable that when looked at month on month there is not much movement. People will be happy to sit it out until we get to the end of the interest rate cycle. This could happen around the end of August in the US followed by the UK and hopefully in Europe next year. There could be a lot of opportunities in the Autumn.”
James Barty, Euro equity analyst at Deutsche, is worried that the interest rate cycle may prove a little longer than many think. “We have seen a decent bounce back, including in the TMT sector where people have been factoring in a US slowdown. Going forward I would expect to see a volatile picture until it is clear the US economy has slowed and that the fed has finished. If we do get any growth indicators that could knock back the hyper growth sectors.”
He is skeptical that we are about to see the end of interest rate hikes, believing that the fed may still have a couple more moves up its sleeve because the economy is not slowing as rapidly as people expect. “This could make for a volatile summer. Consequently, I think investors are looking at the cyclical end, although we think that may not be the right move. Some sectors have underperformed, and telecoms could be a sector to get into. But we would still recommend staying close to home, and if you are going to have a bet have it at the defensive end of the market in the steady grows such as food and beverage, pharmaceuticals and utilities.”
With the top three performing sectors of recent months being food and beverage, energy and health investors seem to have already made that decision. With media and telecoms being the worst performers, a significat rotation has been evident.