There is absolutely no doubt in the consensus view that the world is expecting slower growth next ye...
There is absolutely no doubt in the consensus view that the world is expecting slower growth next year, indeed market evidence from the fixed-income markets seems to be sending us a clear signal that inflation is not a threat. All in all, the case for a perfectly engineered soft landing of the world economy now seems to be in place.
Despite this benign environment which suggests that the worst is over for interest rates, equity markets have over-reacted to this incoming slowdown in profit growth next year. Until very recently there was a big risk premium building up in equity prices, and one also got a feeling of "dŽjˆ vu" as the October 1998 syndrome seemed to be back again exactly two years later.
All this fuss cannot have failed to be perceived by the US Federal reserve chief, who seems to stick to the view that the new economy thrust is alive and well unless the Fed lets this "golden age" grind to a halt.
Recent market history has taught us how difficult it is to steer clear between the two antagonistic pitfalls of inflation and deflation. Hence, we would not be surprised to learn six months from now that the Fed had already started to change gear or even reverse steam during the summer of 2000.
Recent evidence from US money supply data seems to hint at this. If this were true, then this slowdown should prove nothing but temporary and long-term EPS growth should not be put into question.
Several factors favour the Euroland stock markets against this background: Relative growth differential with the US has dwindled, the euro has stabilised, the oil price looks set to fall throughout this coming winter, the eurozone is a late comer into the new economy revolution and the catch-up potential is still huge.
Our most favoured sectors are those benefiting from high EPS growth in the medium to long term, especially technology, healthcare, media, telecom, banks, environmental and financial services. Most of these sectors are riding high on the demographic age wave. Another promising theme would encompass the restructuring mood affecting most industrials, a few cyclicals and utilities in general. In style terms, we favour growth against value despite (or because of) the latter's recent out performance all the way across the recent tech bloodbath.
In terms of size, medium cap stocks look set for a definite comparative valuation advantage versus their senior counterparts.
This being said, several caveats should still be considered. First of all, the euro's stabilisation is fragile, and the eurozone's economic environment cannot be disconnected from the American business cycle. There is a growing minority of economists now fearing a recession over there, if only because a financial crisis is looming again in Asia and even within the US backyard.
Francois-Xavier Chevallier is head of research
at BNP Paribas Asset Management
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