It’s nervy times as markets get through the first quater of 2001. “People are unsure about earnings and are therefore holding on to stocks with proven profitability and defensive characteristics,” says Neill Brennan, head of quantitative research at Schroder Salomon Smith Barney in London. “Market nervousness has seen defensives bounce back somewhat at the expense of technology stocks in the past few weeks.”
Anders Peinert, who is manager of European equities of Storebrand Investments in Oslo, believes that the current instability in the markets has made it hard for analysts to make predictions. “The main trend is definitely downward, but it is difficult to say how far or why. People are very nervous, particularly about the state of the US economy and the fact that we have reached the end of the investment cycle.” He wonders if the downward turn is not now beginning to spread from US consumers to other geographic trading zones. “The main fear is that overspending in the States has brought us to the current low point,” he says.
He points out that equipment manufacturers and telecoms operators sectors are doing particularly badly and were now cutting back on capital expenditure in order to rationalise.
Bernard Coupez, head of external research at BNP Paribas Asset Management in Paris, says that there are three main factors to consider which are affecting Europeean markets at the moment. “We need to look at the consequences of the downturn in tech stocks in the US and its knock-on effect in Europe; we need to consider the dramatic overcapacity in the telecoms industry; and we need to note that even if growth across Europe as a whole remains firm, there is some evidence of a slowdown in Germany.” He believes that these three factors combined cause a decrease in visibility in European companies’ earnings, particularly in tech stocks and cyclicals. However, he says that there are no real problems in Europe at the moment, especially from the consumer’s perspective.
The impact of the recent falls on Wall Street on Europe’s equity markets may be somewhat exaggerated. Brennan points out that whilst volatility is high and people are very nervous, all that it is really happening is that the markets are bottoming out. “We have simply reached the end of the cycle, we are not in crisis mode. Headlines are always exaggerated, for both highs and lows. I don’t think that there lies anything sinister behind them. The markets are not set for a meltdown.”
Coupez agrees: “We are bottoming out; recent developments in the US are exaggerated and people overreact.” He believes that the problem lies essentially in the time it will take to reach the actual bottom before analysts can start evaluating the state of the markets. “ All the pointers are beginning to indicate that the US market is caught in a U shape cycle and not a V shape one, as previously hoped. This means that market volatility will continue for some time,” he says. Peinert suggests that Europe would have survived unscathed by a V shape scenario but the U shape has a detrimental effect. “We initially anticipated that the US would make a quick recovery. That is now not the case and the knock-on effect will mean that Europe’s equity markets will suffer after all.”
Peinert believes that the domino effect began in the US and moved to Germany. “Negative sentiment is coming out of Germany in particular, since her exposure to the US as Europe’s largest exporter is now affecting Euroland in general. If the German economy slows down, then we begin to wonder about Euroland’s internal ability to remain stable.”
Interest rate movements are not perceived as a problem, rather further cuts by the Federal Bank would stimulate positive market sentiment. “The likelihood is that the Fed will cut rates again sometime in the coming weeks, but we do not expect an immediate reaction in Europe,” says Brennan. Although Europe was still influenced by US rate cuts, the Europeans now preferred to wait before reacting in a similar fashion. “But a further cut would benefit euro-zone since cuts here are market driven and designed to stimulate growth.”
Coupez feels that the ECB needs to react more quickly in order to maintain price stability. “The problem in Europe is that the ECB is committed to price stability and if it turns out that the slowdown in Europe is greater than expected, the ECB will need to take the risk and make a cut between 25-50 basis points.”
“The euro has bottomed out and growth across Euroland is still expected to be higher than in the US this year,” says Peinert. However he warns of the dangers of Euro-zone expansion. “Bringing in less disciplined countries like Turkey and from Eastern Europe will have a negative effect on the euro. At the moment its level is sustainable and is attracting inward investment. This is encouraging for Europe.”
Coupez believes that the growth differential between Euroland and the US remains crucial to the euro’s strength. “ If we can maintain the current growth differential, then the euro will benefit by becoming stronger,” he says. He suggests that the euro will definitely go up in value so long as the slowdown in manufacturing doesn’t extend to consumer goods.

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