Events in London and some bad news from the other side of the Atlantic caused some panic across Euroland during the past few weeks.
First, there was the high-profile collapse of Boo.com, which caused a sell-off of technology stocks on growth exchanges in Europe. In New York traders were initially unnerved by bad news on the US trade deficit and then reacted badly to the Fed’s response.
“The markets’ response was a little belated and confused in Europe, particularly the reaction to the interest rate hike. Initially New York reacted positively, but then turned bearish,” says Monika Rosen, head of research at Bank Austria in Vienna. “This smacked to me of second thoughts, and I think the markets are unsure of where to go from here. With a number of IPOs across Europe over the coming weeks, I think the technology sector will continue to be challenging.”
Rosen also believes that there has been an over-reaction, the polar opposite of the euphoria at the beginning of the year. “Although the secondary issues like Boo running out of money sound a note of warning, I think the blue-chip technology stocks are now being sold too aggressively. Over the next few months I would see this as a buying opportunity, although I appreciate that it is very difficult to call the bottom.”
While Rosen feels that technology and telecoms stocks are being “over-punished” she points out that if the weakness of the euro continues, this could present opportunities for export-orientated stocks. “German auto stocks could have bottomed out, and I do not believe that the weak currency benefits have been factored into prices yet.”
The weakness of the euro remains a problem for overseas investors in Euroland, as Sharon Coombs, European equity strategist at HSBC in London, points out. “If you have been a dollar investor in Euroland stocks over the past year, you have been a big loser in terms of the currency, and can only be ahead if you have picked the very best stocks over that period.”
She points out that although there may well be more interest rate hikes in the pipeline in the US, the European Central Bank is in a different situation. “There is no particular sign of inflationary pressure in Europe, which should be confirmed by the next round of indicators. Although there has been talk of an interest rate rise to support the euro, we do not feel there is any need for that at the moment.”
Whether export-led sectors can benefit from the euro weakness depends on how sustained that weakness is perceived to be, says Coombs. “Some sectors are benefiting at the moment, but their share prices are tending to go down in the general market malaise. Although the euro is lower than most believe to be its true value, the only thing that is likely to help it recover is some sign of weakness in the dollar, as a result of the perception that the US miracle is slowing down.”
Tomas Teetz at Trinkhaus in Frankfurt feels that cyclicals “such as chemicals and the auto industry” have certainly benefited from the weaker euro. These sectors could be a stimulus for the market as a whole, he believes. He agrees, however, that the US economy is the key to events in Europe. “I think we will see the Fed strengthening its fiscal policy and increasing rates again. This is a problem for the US market, and any further signs of a strengthening economy will be bad news. Europe will probably be stormy for the next few weeks, especially the TMT sector.”
He also believes that the ECB will be forced into interest rate increases, in an effort to rectify the euro disparity with the dollar.
The markets then remain volatile, and Coombs thinks that the next month will see more of the same. “There is a lot more nervousness around, reflecting what is happening on NASDAQ and among TMT stocks in Europe. In particular, there is going to be concern about the cost of third-generation mobile licences in Europe, now that European licensing is going to mirror the British model. This means there is concern about the balance sheets of these companies, which are going to have to take on quite a lot of debt to pay for these licences, or raise more equity. They may well find the latter very difficult in the current climate. There are a number of large IPOs in the pipeline in Sweden and Germany, which may suck up most of the demand in the market.”

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