Technology

A New Economy Effect in Europe?


These past months have not been great for stock markets around the globe. Affected by tremors on the Nasdaq, most European markets posted negative results for 2000. From mid-January, 2000, to the same period this year, the Paris Bourse eked out a 3% gain, but the London Stock Exchange lost 5%, and Germany's star stocks lost 6%.

And in exchanges specializing in tech stocks, the fall has been even more dramatic, with a near-50% drop on Germany's Neuer Markt and a 15% decline on France's Nouveau Marché.

But according to numerous analysts, strategists, and fund managers, 2001 is the year for a turnaround in Europe. Continued growth on the Continent, even though things are slowing down on the other side of the Atlantic, should contribute to healthy share performance in Europe. In a recent survey conducted by Merrill Lynch & Co., fund managers clearly stated their intention of buying European shares.

GROWTH MOTOR. The drop in oil prices and the rebound of the euro should also contribute to the buying power of consumers and thereby boost consumption, which has been a motor for growth in Europe. Analysts believe that Europe, like America in the mid-1990s, is, for the first time, benefiting from the effects of the New Economy. This, in turn, will allow companies to improve productivity and boost profits.

Market researcher Jacques-Chaine Finance (JCF) recommends that investors overweight their portfolios with shares from European exchanges. According to JCF, U.S. growth will be 1.8%, which implies a 5% drop in weighted profits for the stocks in the Dow Jones industrial average.

In Europe, however, JCF predicts 2.6% growth for this year and a 4% rise in earnings per share for companies in the Dow Jones Euro Stoxx 50. Analysts at JCF predict 2.7% growth in France and an 8% rise in earnings per share for companies in France's CAC 40 index. The CAC 40 is, therefore, expected to rise by 6,700 points by the end of the year.

TOO EARLY FOR CYCLICALS. According to JCF, investors should favor Europe, since the impact of the economic slowdown on company profits will be less intense than in the U.S. The euro zone will also benefit from a reallocation of assets leaving the U.S.

Analysts at JCF do, however, believe that it is still too early to return to cyclical stocks, given the uncertainty regarding the scope of the economic slowdown. They believe that tech stocks are again looking attractive, yet not in the telecom sector. JCF is confident about software editing and computer services, and remains neutral on semiconductors.

And many other sectors still remain undervalued in Europe, according to the strategist Jean Borjeix at French brokerage Oddo-Pinatton. Borjeix bases his findings on relative price-earnings ratios in European sectors and profit forecasts for 2001. Like JCF, Borjeix believes European tech stocks, which were massacred last year, will rebound.

Other undervalued stocks are in the media sector, for example, especially considering recent announcements that profit forecasts would be better than originally expected. Telecom operators are also looking more appealing, thanks to the drop in licensing costs for mobile phones. The hotel and luxury groups remain undervalued, while the food and beverage sector is looking more and more attractive.

REBOUNDING EURO. Jean-Pierre Sueur, a strategist at France's CIC bank, predicts that although growth in the euro zone has peaked, a slowdown will only be moderate. And a first move toward a rate cut, which is expected to occur later this year, should make the zone attractive for international capital, especially now that the euro is on the rebound.

One country this trend won't help is Germany. As the euro gains in value, especially against the yen, Germany's exports become less competitive in international markets. This comes at a time when domestic consumption is only just starting to take off again. But Germany is counting on a number of things, including an increase in consumption this year, tax reductions, a drop in unemployment, and retirement reform to balance things out.

Other countries, however, won't have to worry as much. According to analysts at Crédit Suisse Asset Management, British shares, for example, should do well. "The market looks interesting if you look at its defensive character and its valuation compared to other countries. Company profits will not be revised in Britain, with the exception of oil shares, and growth that reached 11% last year will fall back at the most to 10% this year," says the firm.

ALL IS NOT GLOOMY. Despite small discrepancies among different countries, however, investment opportunities are likely to be similar across Europe. According to calculations by Aptimum Conseil, the company that ranks European funds for Le Monde, all the European markets are evolving in a similar manner.

"With the exception of the Footsie index on the London Exchange, we notice a rather big similarity between indexes like the DAX 30, MIB 30, IBEX 35, and BEL 20 compared to the Dow Jones Euro Stoxx 50," says Aptimum.

The research firm also points out that exchanges in France, Italy, and the Netherlands are performing in line with other European markets. That means all is not gloomy after all, at least not in Europe, where investors will largely have their choice of hot stocks this year. By Joël Morio

Translated by Inka Resch


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