At this time European markets have recovered 25% from their lows and are now more or less on the sam...
At this time European markets have recovered 25% from their lows and are now more or less on the same levels as at the time of the attacks on the US.
I now expect a brief period of consolidation while profit forecasts for next year are revised to more realistic levels, but I believe European equities still offer good value at these levels and will move higher over the coming months.
I am keeping relatively low cash levels and will continue to add to specific stocks where short-term disappointment provides buying opportunities into companies with strong market positions, in the media and electrical engineering sectors, for example.
As we enter the reporting season for third-quarter numbers, I don't expect the market to maintain its recent rate of performance because there is still scope for disappointment over companies' outlooks for this year and next. According to published consensus data analysts' estimates are for earnings to increase by about 17% in 2002. While the market already knows this level is too high, there is still scope for disappointment at the size of downgrades and investors will be anxiously listening to company guidance.
It is clearly too early to say what the ramifications of recent events if the US will be, but some confidence can be taken from the swift response of the world's central banks in reducing interest rates and the proposed US fiscal package. It is possible growth forecasts are revised but currently real economic growth in Europe is forecast at about 1.3 to 1.5% for 2001 and 2002. These levels are at the bottom of the historic range for growth.
Technology stocks in Europe have had a very good bounce of late. Phone equipment companies Nokia and Ericsson have bounced 50% and 22% from the lows. Nokia is now trading on 26 times 2002 earnings with a risk of further downgrades. I don't expect the stock to make much progress from here, as investors will again focus on the challenges facing the company, in particular whether the new GPRS technology can revitalise handset sales.
I am maintaining an underweight in the technology hardware sector, the main exposure being in semiconductor stocks, because the product is used in a more diversified range of products.
In my view, many economically sensitive areas are almost attractive but prices have yet to reflect the severity of profit downgrades likely for this year and next.
Among the hardest hit stocks are those exposed to discretionary consumer spending such as car manufacturers like Daimlerchrysler and luxury goods maker LVMH.
These stocks have also recovered somewhat but remain significantly below levels in July, for example. The best opportunities may lie here over the next two weeks.
My preference is for company-specific opportunities rather than attempting to anticipate a general economic or tech-led recovery. One example is Schneider, the French electrical company, which recently had a merger with Legrand, another French company, blocked by the EU.
Economically-sensitive areas attractive.
Disappointment leads to opportunities.
Tech stocks have had a good bounce.
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