As the world watches the US markets with some trepidation towards the year-end, Euroland analysts are confident that the good news will continue for them.
Continued steady growth and low inflation are providing an encouraging backdrop to equity trading, and although the European Central Bank is expressing concern about upward price pressure there seems little reason to expect too strict a monetary response from that quarter. While it is also keeping a watchful eye on the German economy in particular, southern Europe has also begun to show strong growth trends, and thanks to convergence, reduced inflationary signs.
David Bowers, equity analyst at Merrill Lynch in London, confirms that Euro-zone equities are the “best of the bunch” compared with the US and the UK. “This is because we can see a clear recovery coming through. Mainland Europe was the last of the market zones to pick up, and with estimated GDP growth of around 3% for next year, we would expect to see earnings benefit.”
Bowers warns, however, that a booming global economy and the prospect of rate rises are the downside. “They represent a bad combination for the world's markets,” he says.
Nevertheless, the prospects for the continent's markets looks good with cyclicals especially benefiting. Alexander Kockerbeck, assistant director and senior economist at Dresdner KB in Frankfurt, expects euro growth to continue its upward curve in the last two quarters of this year, and is also optimistic about 2000. “We can see growth of 2.7% to 2.8% next year, with inflation under control. Headline inflation should peak around 2% in February in line with the ECB predictions, and fall back to 1.4% in the summer and 1.2% in the autumn. Our main line on this is oil prices.”
Kockerbeck expects the bond market to put pressure on equities in the summer and autumn of next year, but feels that the climate is generally benign for equities. “Our worry, of course, is the US and we anticipate a correction in the Dow Jones, but not a collapse. But a strengthening world outlook and a booming Euro-zone should prove adequate defence. Neither would I be too concerned about a hike in interest rates. Even the predicted 50 basis points has probably been priced in by the markets already.”
Euro-economic sensitivities are likely to be the sectors showing strongest as the new year begins, with cyclicals with a global exposure driving the markets from now to the year end, suggests Bowers. “There is also restructuring to be done among the retail banks, and the financial sector is definitely the dark horse as we move towards 2000,” he said, confirming that most fund managers are very positive about the Eurozone in the spring. Kockerbeck agrees, but warns that Y2K is still making investors nervous, “But this cautious approach affects bonds too, and I would pencil the DAX in at around the 5,000 level by the year-end.”
The continuing problem of liquidity, exacerbated by Y2K anxieties looks set to continue until the end of the year. Klaus Bayert at HSBC, suspects that many investors closed their books as early as September, and certainly October saw a slowing down. He agrees on a DAX figure of 5,000 for the year end, but warns: “Continuing pressure in the US will definitely have an effect in Euroland. Should the Dow Jones slip to say 9,500 then expect the DAX to respond and go as low as 4,500. There is a risk of this for the next four to six weeks.”
Nevertheless, he offers some optimism for the year end. “Because of the liquidity problems, both institutional and private investors have huge cash positions. It is quite conceivable that we will see a small rally in December, as we have done in past years, and certainly we expect a very positive start to 2000,” he says. Kevin Hall