There is no question the events of 11 September significantly changed the outlook for the global eco...
There is no question the events of 11 September significantly changed the outlook for the global economy and stock markets across the world.
The initial impact from a macro point of view has clearly been to push back the prospects for an economic recovery. At RSA Investments, our economists have revised forecasts for European growth and interest rates in 2001 and 2002 down fairly radically.
In this environment, we expect to see further earnings disappointments, as the global economic slowdown continues. There is also evidence to suggest that companies are bringing forward bad news into their upcoming results, and it is clear that bottom-up analysts' forecasts will still be cut substantially from here.
One of the key issues is the extent to which the market has factored this in. A further element is the rising cost of doing business caused by factors such as increased transport costs, extra security and of course, increased insurance premiums. If these factors persist long-term, which we believe is likely, markets will need to make a step change to accommodate them.
In the short-term, we see little change to the pattern of volatility, and would not be surprised if European markets gave up some of their recent gains. Valuations are certainly more attractive, and investors are showing a little more tolerance for bad news, but the huge weight of potentially disappointing corporate announcements and uncertainty over the geo-political situation could well strain nerves in weeks to come.
Looking further out however, there are grounds for more optimism. The European Central Bank will cut interest rates further. Economic growth in 2002 should be stronger than 2001, and for many companies the year-on-year profit comparisons will become easier.
The supply of equity is also looking more helpful: new issuance that had been due earlier in the year has all but dried up, in line with the market downturn. There was around e100bn of telecom paper alone due to come to the market at the start of the year, none of which has been seen.
Putting all this together, we believe there is potential for stronger stock markets, but we are unlikely to see a return to the sorts of growth experienced in the 1990s.
Instead, investor returns will be driven increasingly by strong stock picking.
The volatility of recent weeks has thrown up a number of specific money making opportunities in Europe, but importantly we continue to stick with the longer-term winners.
The French pharmaceutical company Aventis has long been a favourite of ours and has proved an excellent investment. It has now moved from being a restructuring story to one of top-line growth and margin expansion, and this is at a very inexpensive valuation in a sector at a substantial premium.
German retailing has historically not been a sector of the market to set the pulse racing. The change of management at Karstadt Quelle does, however, provide the opportunity to shake up what was a pretty sleepy company and significantly enhance profit margins.
Some stock-specific opportunities.
Further interest rate cuts to come.
Long-term picture still looks attractive.
Impact of the terrorist attacks.
More earnings disappointments.
Global economic slowdown.
Davina Curling, director of European equities at RSa Investments
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