European markets are buckling under the gloom which has afflicted global economies since the US bega...
European markets are buckling under the gloom which has afflicted global economies since the US began to lose momentum, according to Jamie Sanderson, head of European equities at Edinburgh Fund Managers.
For the year to 29 March, the Bloomberg European index has fallen 13.20% in sterling terms, while the FTSE All-Share has fallen by 9.38%.
Sanderson says: "Over the past few weeks, pessimism which had previously been confined to the technology sector has been spreading to the whole market as investors become less confident of a soft landing stateside."
Sanderson is convinced that investors are increasingly worried that the Federal Reserve will not be able to produce a quick-fix solution to the cooling US economy. He believes Germany will lead the reaction to a hard landing in the US, if it happens, because it has the highest exposure to the US through its exports.
He says: "A downturn in Germany, the largest economy in Europe, will inevitably lead to repercussions on a pan-European scale.
"Germany is in the frame to be affected, not only because of its US exports dependency but the nature of its industry, which is heavy and generally exposed to cyclical organisations."
Sanderson believes countries such as Switzerland, Belgium and Denmark should be largely protected from this European downturn. He says: "To understand why these countries are more immune to the problem, you should examine the composition of their stock exchanges."
He believes these countries' heavy exposure to the pharmaceutical, financial and utilities markets means they are better equipped to deal with the problems of a cooling economy.
Sanderson says: "The sector is in a wait-and-see mood. The first half of the year so far has been awful and naturally the investment community is waiting to see whether the second half is likely to be the same."
He believes the majority of investors expect the second half of the year to improve, although he admits that many others feel the pick-up will not come until 2002.
Part of the problem, according to Sanderson, is a lack of confidence in the European Central Bank.
He says: "The ECB has been somewhat complacent over the potential damage that a slowdown in the US could cause. More recently, investors have started to believe that the European Central Bank has been somewhat unrealistic in its estimations."
Sanderson believes that European GDP growth is likely to be less than was originally expected. Edinburgh has cut its estimate from 3% to 2.6%. Neil Robson, head of the European Specialist Equities team at Baring Asset Management, is similarly bearish and predicts growth of 2.5% for the year 2001.
However, he is positive on the levels to which valuations have dropped, and, over time, believes demand will pick up as the current level of risk aversion begins to drop. He also believes falling interest rates will have a positive effect. He says: "Each time short rates have been cut, equity markets have reacted positively and it didn't even matter in which direction earnings growth was heading at the time."
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