After a fourth quarter rally, European markets have struggled to make headway at the start of the ye...
After a fourth quarter rally, European markets have struggled to make headway at the start of the year.
Many fund managers have been faced with the dilemma of wanting a war to start in order to create more economic certainty, while privately regarding such an outcome as morally dubious.
There seems little doubt that marginal capital expenditure decisions and industrial ordering have been severely stifled by the cloud of recent geo-political events and without swift resolution current market torpor could well last for a while yet.
Is there anything bullish out there providing solace for the European markets? Bonds have clearly had a great run but may be over extended against European equities. Also, it is clear that corporate managements are becoming more realistic in terms of seeking to improve shareholder returns.
The recent announcements by Suez to focus on assets providing positive returns on invested capital is clearly a step in the right direction, even if it has not helped his share price.
Risk appetite may be increasing in certain areas. I would highlight Latin America and asbestos as two areas where recent stock price moves would suggest the market is prepared to give the benefit of the doubt to previously troubled European companies, like Repsol in Spain and St. Gobain in France.
Unfortunately, though, relative value is not enough for markets so entrenched in a bear trend. Leaving aside the crisis of confidence induced by the Iraq situation, European markets have once more started the year being too optimistic about prospects for corporate profits. As the results season has unfolded, corporate managements have had to reassess the current business climate.
Visibility has disappeared and forecasting has become extremely difficult. If, as seems likely, the US dollar maintains its recent trend, analysts too are going to have to reassess their estimates. My feeling is that in such a situation figures will be downgraded rather than the reverse. This will put more pressure on the markets and force an even more stock- selective approach.
Domestic stocks are the likely beneficiaries of such selectivity, coupled with companies with dollar costs and international sales. Domestic utilities and telecommunications companies like Iberdrola and KPN and international retailers like Hennes & Mauritz fall into these categories.
In the short term, while risks remain to the downside for the markets, focus will remain on cash returns, repairing balance sheets and earnings certainty. The market will have to differentiate between best and worst in class in each sector in an effort to eke out the best returns.
Confidence, although at a low ebb, has not yet reached the levels of extreme pessimism needed to herald a return to bull market conditions, but in the interim, volatility will be ever present and rallies swift and strong. These are clearly not markets for those of a nervous disposition.
Extended bond market.
Management seeking to improve returns.
Corporate bond spreads supportive.
Weakening dollar hitting forecasts.
Corporate visibility non-existent.
Geoplitical risks damaging confidence.
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