Robert Fuller
Euroland has arrived as a securities marketplace, according to no less an authority than the Bank of England. In a new edition of its practical guide to the euro, the Bank says “deep and liquid markets have become well established, replacing the previous – more segmented – national markets.”
Practitioners in the field don’t quite see it this way yet. Both Alex Scott of Barclays Stockbrokers in London and Thomas Teetz of Trinkaus in Düsseldorf agree that it depends on the investor base. “This would certainly seem to be the trend for institutional investors,” says Scott, though not for smaller retail investors. “Certain sectors have appeared to benefit from the new euro market,” states Teetz, quoting primarily technology, pharmaceuticals, chemicals and oil as trend-setters. However, no supranational indices have yet become the benchmark for rating euro-based companies, say the analysts. “Everybody still looks at the DAX or the CAC 40,” observes Monika Rosen of Bank Austria in Vienna, who claims that the suggested prevalence of the new euro stock indices is exaggerated. “But these new European benchmarks will need to be watched,” she nonetheless concedes.
Sadly it was the year that the euro did not live up to expectation, spending most of it on a downward spiral. The weak euro has nonetheless helped exporters, particularly of consumer goods, but the negative effects are beginning to outweigh the positive.
Rosen feels that the euro now needs to regain some ground to induce inward investment. “The weak euro has eroded the profits of international investors and has not really bolstered confidence in our equity markets,” she points out. She stresses that the euro would benefit if the American asset market were not so attractive and predominant. But she also states that the currency markets are volatile and unpredictable and can turn quite suddenly.
Teetz feels that though the weak euro initially had a positive effect on earnings and exports, people were now beginning to ask why the euro was not performing to expectation. He believes the reasons are largely political and that this is not the right message for equity trading.
As the year draws to a close, analysts and strategists are now reflecting on 2000. One key feature is that the buoyancy of 1999 has certainly not been repeated.
“In terms of equity prices, it has been relatively flat,” comments Scott, though he does identify some differences between sectors, with technology booming and then slumping whilst investors are now looking for value and asset-backed safety. He also cites some avoidance of cyclicals, as the economy begins to slow down.
Rosen also notes the strong performance of technology at the beginning of the year but blames its subsequent weakness originating in the US for the relative poor performance of equities in 2000. This has led to “an overall disappointing performance in the main indices,” she points out, whilst also affirming that some segments of the market did better than others, particularly defensive pharmaceuticals and consumer goods. She confirms nonetheless that indices this year will in no way “repeat the performance of last year”.
Teetz states that, despite record highs in technology at the beginning of 2000, 20% or more has been corrected in this sector since the spring and this has helped reshape the market. Oil prices in particular have developed uncomfortably and earnings estimates have been revised as investors become cautious. He also identifies extremes in the market with defensives showing positive results.
Interest rates, however, are not currently perceived to be a major problem. “We have reached a plateau,” comments Rosen. “We are now in the top of the cycle,” is Teetz’s opinion.
In the longer term, interest rates are expected to fall, allowing increased liquidity and confidence in Euroland’s equity markets. Nonetheless in the shorter term, it is thought that the European Central Bank may make a further rise of 25 basis points. Inflationary pressure would be the reason for the rise, suggests Rosen who views the ECB as being “hawkish in its rhetoric” towards fighting inflation, since low inflation generates growth.
Teetz believes that inflationary pressure in the oil sector would play a big part in the anticipated hike, but in general terms he sees Euroland equities as being unfazed. Overall, the equity markets are considered to be in a healthy enough position to be able to absorb another interest rate rise.
The future is seen favourably, with defensive sectors, such as pharmaceuticals, foods, healthcare and consumer goods continuing to grow as we move into 2001. The technology sector is also expected to show some recovery on the NASDAQ, which will fuel the European technology markets. Financials are also tipped to do well, thanks to the ongoing consolidations within the industry. By contrast, cyclicals are expected to show some decline.
A slowdown in the US could however prove detrimental to European equity markets. “Europe tends not to be able to distance itself,” explains Rosen. “We hope it will be a better year than this one,” she continues, “the first nine months of this year have been an anomaly.” Teetz goes further, anticipating earnings growth, high liquidity and lower interest rates induced by German and Europe-wide tax reforms.