Over the course of the year, the FTSE Europe (ex-UK) index barely changed, and the HSBC Europe (ex-U...
Over the course of the year, the FTSE Europe (ex-UK) index barely changed, and the HSBC Europe (ex-UK) Smaller Company Index fell by around 7%. The technology-heavy Neuer Markt in Germany, meanwhile, plunged around 40%. The demise of the once-hyped Neuer Markt highlights the huge volatility prevalent in European and global markets over the past few years.
The story of 2000 for European smaller companies can be split neatly into two parts, pre- and post-10 March. Up to this date, small cap stocks had flourished. The HSBC smaller companies index rose 15% from the start of the year to that point. And, as in the UK and US, most of this growth was concentrated in technology, media and telecoms (TMT).
Tech stocks in particular enjoyed huge surges on the back of the perceived high growth in this area. The Neuer Markt rose a staggering 87% over that short period. Shares in internet-related companies were in high demand and investment bankers enjoyed an early Christmas with a seemingly endless procession of initial public offerings (IPOs) coming to market.
The grey market prices of some of these issues, the unofficial trading price prior to a formal quote, showed up to 50% premium to issue price.
It is therefore not surprising that most of these issues were heavily oversubscribed, sometimes 40 or 50 times, and that investors inflated orders in an attempt to get stock.
The large cap index, meanwhile, posted a more moderate 6% over the same period, although this disguised major movements within sectors. The Telecom, Media and Technology (TMT) sectors soared, continuing the charge started in Quarter 4 1999. France Telecom rose about 50% in the first two months, and the mobile giant Nokia about 40%.
Meanwhile, companies in the 'old economy' sectors, such as engineering and pharmaceuticals, saw their stock prices slashed. The fact that these companies were posting decent results and were enjoying good market conditions was somehow overlooked.
All this changed on March 10, as reality began to set in. Net stocks collapsed, and the investment bankers' gravy train came off the rails when a series of high profile listings failed in spectacular fashion. Major investment institutions had become rightly suspicious of the stream of constant IPOs. Certainly the quality of some of the later deals was highly questionable.
I recall being offered stock by a large investment bank on behalf of a medical device company that had no sales, no distribution and no marketing.
The valuation was based on one analyst's estimates going out a ludicrous number of years into the future, and therefore of little use.
Although this company did have a potentially good product, this type of investment is pure venture capital. The most high-profile PR disaster in continental Europe came in the shape of World Online's listing on the Dutch exchange. As tends to be the case, it was the retail investor that probably suffered most.
The Neuer Markt also suffered from alleged insider dealing in certain companies, suspect accounting, and a raft of high profile profit warnings. The latter was largely symptomatic of analyst's estimates being far too high and companies misleading the market as to growth forecasts.
Those technology or internet-related services companies valued by 'finger in the air' techniques promptly collapsed. Unfortunately for some of the higher quality companies, simply being associated with the Neuer Markt has seen their stocks prices fall subsequently.
The result of all this was that the trend for Euro smaller companies over the rest of the year was inexorably downward. The Neuer Markt plunged to around 2,700 from its peak of about 8,500 in virtually a straight line
Not all European smaller companies funds fell in line with these indices. While those crammed with smaller tech stocks suffered, other achieved respectable double-digit gains. The reality was that, outside of TMT, some sectors enjoyed a fruitful year.
One industry that came to the fore was biotechnology. The US market has had listed Biotech stocks for a number of years, as has the UK to an extent.
However, continental Europe had only a handful of investible companies until last year, which saw the listing of a large number of these stocks, mainly in Germany. Newsflow was generally positive with the discovery of the Human Genome, and most IPOs were very successful.
Rhein Biotech, for example, started the year around e27 and finished at 120. The medical device, electronics and financial sectors also performed very well.
Countries with high growth and/or good technical expertise such as Ireland and Switzerland also proved to be a good place to invest.
The mainstream indices did suffer last year but to less drastic an extent than their smaller company counterparts. The main index, the FTSE Europe (ex-UK), fell only in the last quarter of the year. And although the large indices held up relatively well over the year the TMT bubble had an effect as well.
The Telecom sector, for example, has collapsed on the back of enormous payments for third generation mobile phone licenses. Dragged down by high debt, France Telecom fell back to around e100, and at the time of writing was preparing to float Orange to raise some cash.
On the plus side, defensive sectors, such as financials, pharmaceuticals, oils and food producers, performed well in the second half of 2000. Such a reversal can be explained largely by the uncertain economic outlook in the US, with the presidential election fiasco making matters worse.
So where to in 2001? The key going forward is the success or otherwise of US economic policy. The recent easing of monetary policy in the US has been taken positively by the stock markets as it, and subsequent rate cuts, may avert
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