Stock exchanges in stand-by, but recovery has arrived

The economic recovery is underway in the euro-zone as well as globally. The ECB decided to leave interest rates unchanged at its meeting on February 5th, while the Bank of England raised its rate by a quarter point to 4.0%.

Sara Silano 09.02.2004
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Since the start of the year the MSCI Euro Index has gained 2.1% in dollar terms, as of February 5th. It has mainly been the smaller countries that have done well so far this year with Greece up 8.2% and Finland up 12.8% as of February 5th, in dollar terms. France and Germany is up about 1.3% over the same period.

It is becoming clear that the global economy is improving. This now includes also Germany which no longer is in recession and where Gross Domestic Product (GDP) was up 0.2% in the third trimester of last year. However, some critical factors are still around and there are continued concerns over the strength of the euro. It is also a fact that the interest rate in the euro-zone is higher than in the US.

European markets has been shocked by the Parmalat scandal, involving the Italian food company quoted on the Italian stock exchange and stocks of the banks involved has been hit as well. It has however not spread to become a general pressure on equities in the region.

January also saw an increased volatility in the foreign exchange market where the euro-dollar reached 1,29 on January 12th only to come down below 1,24, before the European Finance ministers’ meeting on January 19th. There were worries that they would take measures against currency volatility.

The European Central Bank (ECB) monitors the currency markets, but it has adopted a stand-by policy. At its meeting on January 5th the bank left rates unchanged at 2%. The bank stated that it is optimistic on the economic recovery and it expects inflation to fall below 2% this year. Analysts think interest rates will remain unchanged until the second part of 2004.

Business managers in the region are also confident. In Germany, the Ifo Index of business conditions beat expectations and rose for the ninth consecutive month. The French Insee survey also showed a rise in business confidence for the seventh month, though a slowdown in export orders due to the euro appreciation. According to the Henderson Global Investors economists, there are evident signs that “the economic recovery has arrived in Europe”.

The UK is a different story. According to Merrill Lynch survey, fund managers are currently relatively downbeat about the market because of its defensive character. It has a high proportion of firms in defensive sectors such as energy, financials, pharma and telecom service providers. This means that when managers are optimistic about a global upturn, as they are at present, they tend to think the UK will lag behind. By the same logic the UK tends not to fall as much when there is a downturn. However, in the fourth quarter 2003, the economy recorded the greatest increase of last 4 years. According to the statistics national office, GDP rose 0.9% last quarter (+2.5% in 2003) and retail sales increased of 0.9% in December, the highest level since June. The Bank of England raised interest rates to 4% on February 5th.

According to Morningstar’s monthly survey of fund managers in Europe, the European Fund Trends, fund management groups are becoming less pessimistic on the outlook for European stocks.

According to a report from Union Investment, the investment management group say that it’s probable that company profits will now grow thanks to sales. Last year they grew thanks to expenses cuts. According to Adriaan de Mol van Otterloo, manager of Schroder ISF Euro active value fund, “Europe is home to some of the best value opportunities in the western world.
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Sara Silano

Sara Silano  è caporedattore di Morningstar in Italia

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