There’s still no end in sight to the slowdown in the Euro-zone equity markets. This is the opinion of Marc Breutsch, head of economic research for Swiss Life Asset Management in London and Zürich, who says persistent negative macroeconomic data is not stimulating growth despite some areas of the market picking up. “Higher car sales and stronger retail growth in the Netherlands and Spain have not prevented activity in the markets from getting weaker over the past month,” he says.
Soren Schjodt-Hansen of Finanssektoren Pensionskasse in Copenhagen confirms that the markets are being driven by business and macroeconomic data at the moment, not by individual stocks or sector movements. “The problem is people keep jiggling with their thoughts about when the markets will turnaround. This is not helping investor confidence in Euroland stocks and consequently the markets continue to suffer.”
He says that here has been some movement out of the equity markets into bonds, since these are less volatile. “Bond markets are doing well. Low growth is still having a negative impact on equity trading levels as people shift their positions into fixed income because they are traditionally more stable and they will be able to recoup their returns in the long run.”
Aexandre Deveen, an investment strategist at ING Investment Management Brussels, agrees that the fixed income markets are doing well as uncertainty continues to hold back investment in the equity markets. “The anticipation in the markets for recovery in the growth of earnings and GDP is continually delayed, as opinions are up and down from one week to the next. This is keeping the equity markets depressed, as investors are likely to remain shy until they see some stability return.”
He says that things should improve in the coming months, but we are still suffering the aftermath of the new economy and tech stocks bubble bursting last year. “Though liquidity remains good, fixed income at the moment is attracting business away form equities.”
Schjordt-Hansen says that cash markets are also picking up business from equities, but that things could change very rapidly if more positive economic data were to emerge. “The equity markets are likely to rally really quite quickly if growth rates improve and confidence is restored to the economy in general.”
Breutsch believes that any rally in the global equity markets must come from the US and things are looking better there at last. “The number of listed stocks with rising prices outnumbered those in decline in recent weeks.”
But investors are not getting back into the market as earnings are still down and the technology and telecoms sectors are still showing a lack of visibility about the future. Breutsch believes that there needs to be “clear signs of cyclical recovery” in the US to stimulate confidence in the markets, despite high levels of liquidity among investors. “America must once again take the leadership to start a global equity rally.”
Deveen agrees. “The US economy remains the sole engine driving the global markets. Unless we see real signs of recovery there, then Euroland equities will not rally.” He warns that the bottom may not yet have been reached and that things could get worse as consumer confidence in the US is waning in the wake of recessionary fears.
But not all sectors are doing badly. Deveen says that defensives and healthcare are doing well, whilst fundamentals are picking up in the longer term. Defensives, however, can become expensive and drive investors away.
Schjodt-Hansen points out that whilst defensives are “doing ok”, telecoms and tech stocks are still underperforming. He also feels that there needs to be a change in US markets before Euroland can expect signs if improvement but doesn’t identify any turnaround yet. “The US market continues to be rather depressed at the moment and that is having a knock on effect in Europe. Basically, investors are keeping out.”
Breutsch and Deveen both feel that a strong dollar remains in Europe’s interest. “A weak dollar would cause problems for US growth, a situation we do not want to see, as our own growth rates would suffer as a result,” says Deveen.
He says that the recent appreciation in the euro has a more psychological effect for Europeans, and only offers very short term relief. “We would need to see a more pronounced appreciation in the euro to stimulate growth in the equity markets here, but not at the dollar’s expense,” he says.
Breutsch argues that the European Central Bank still lacks investors’ confidence and this is only likely to be reignited from developments in America, not Europe. “Net capital outflows from Euroland for the first six months of 2001 have already reached last year’s total volume.”
Schjodt-Hansen isn’t much more optimistic, highlighting depressed data and weak capital inflows into the US as reasons the recent hike in the value of the euro isn’t having a strong impact on Euro-zone equity trading. “The stronger euro could actually cause growth and trading levels to slow yet further, if it continues to appreciate. Markets will fell the pinch form a strong euro in a depressed US driven global economic environment.”
Though there are no signs if inward investment yet, Schjodt-Hansen does, however, feel that it is good to see the euro in an even trading range, since it will help stimulate the markets when the turnaround finally comes.

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