By Alistair Duffy, a fund manager at Aegon The only certainty in European equities is that marke...
By Alistair Duffy, a fund manager at Aegon
The only certainty in European equities is that markets will remain uncertain in the months ahead. In the short term, it looks as if they fall further as investors digest the implications of revised profits forecasts in the run-up to the reporting season. No real improvements are expected, either in earnings or short-term prospects.
The unstable world political situation, with the US taking an increasingly hawkish stance on Iraq, could further dent investor sentiment. The economic picture is gloomy and weakest in Germany, where fears of a credit squeeze have arisen.
Equity valuations still appear attractive, although no particular sectors stand out. However, the most notable characteristic of the market has been its roller coaster nature.
In August, for example, stock prices fell, recovered and fell away once more, then plummeted in September. This highlights a serious problem with equity markets ' they may look cheap but where have the buyers gone? It appears war risk, uncertainty over the economic outlook and a murky outlook for company earnings have combined to destroy confidence.
The market was relieved the deadline for US companies to report dubious accounting passed quietly. This was a positive step, as recent scandals have led to unprecedented investor mistrust regarding the reliability of corporate accounts.
However, the weaker economic news, taken together with the recent strengthening of the euro, has proved damaging for exporting sectors such as engineering and paper. Insurance stocks have retreated from the highs they reached in July, dragged down by concerns over their liabilities arising from the floods in Central Europe and poor results from sector heavyweights Allianz and Swiss Re, as well as cash calls from Zurich Financial Services and others.
There have been few hiding places over the past few months apart from defensive sectors such as personal care.
Growth in consumer spend-ing is still slow, as European consumers remain concerned about the threat of rising unemployment.
It is unlikely to improve over the next six months. Low real wages and job creation, accompanied by corporate restructuring and industry consolid- ation, will continue to curtail demand.
The European market is currently trading on around 16 times the current year earnings. There are grounds for optimism that markets can rise ' compared with recent history, and relative to bond markets, valuations still appear inexpensive.
Second-quarter earnings figures were slightly disappointing and companies have been reluctant to provide much in the way of guidance for the remainder of the year. Few earnings surprises are likely to emanate from the forthcoming third-quarter season.
We are currently negative on the prospects for the technology, media and telecoms sectors, a stance that benefited our funds in early August. Our overweight position against the benchmark in insurance stocks also proved beneficial, although this was reversed in early September to lock in some of the gains.
Markets may now have bottomed.
Growth should speed up into next year.
Interest rates to remain stable in short term.
Earnings growth set to remain low.
Economic p[icture remains uncertain.
Q" earnings are disappointing.
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