Why Europe's Bear Market Is Worse Than America's
By Matthew Lynn
London, July 31 (Bloomberg) -- Watching any news program, or reading the bulk of financial commentary, you could be forgiven for thinking the bear market is a largely U.S. phenomenon.
The news is filled with U.S. corporate collapses, with U.S. accounting scandals and with the decline of the dollar. The opinion pages fill up with wise-looking pieces on the unwinding of the U.S. economic miracle.
But the reality is different. The raw numbers say that though the U.S. is indeed going through a savage bear market, European markets are having a much rougher time. The U.S. may have bigger scandals but Europe has a bigger collapse of confidence.
That is a mystery. Europe, after all, avoided much of the speculative hype of 1999 and 2000. Yet, though it never climbed so high, it has fallen harder. It skipped the party but got the hangover all the same -- surely the worst of all possible worlds.
So far this year, the Dow Jones Industrial Average has fallen 13 percent and the S&P 500 Index 21 percent. Those are big falls, but some of the main European indexes fared worse. France's CAC-40 is down 25 percent as is Germany's DAX. The FT-SE 100 has fallen 19 percent. And be thankful you are not Swedish -- Stockholm's OMX Index is down 37 percent this year.
The figures look just as bad when you measure from the peak. The Dow has dropped from 10,673 to just over 8,680. The FT-SE 100 is down from a peak of 5,362 to just over 4,200, the DAX from 5,467 to just over 3,800 and the CAC from 4,720 to just over 3,400. Whichever way you divide up the cake, Europe has secured for itself a grisly and meagre slice.
State of Europe
Why is that? And what does it say about the state of the European economy?
On the surface, Europe's markets should be doing better than the U.S. There is no Enron Corp. or WorldCom Inc. in Europe. True, there have been several big corporate disaster stories -- NTL Inc. in the U.K. and Vivendi Universal SA in France (there are quite a few more waiting to unfold -- watch out for Fiat SpA, DaimlerChrysler AG, GlaxoSmithKline Plc and Vodafone Group Plc). But though there is much stupidity, hubris, and chaos there are very few instances of fraud, deception or crookedness. Either through luck, or through better corporate governance, there is no crisis of trust in the economic system in Europe.
Nor is there the same sense of panic in the economy. The euro is not falling but rising. Foreign investors are not fleeing the continent (there weren't many of them to flee). Trade and budget deficits are not ballooning out of control. Growth is sluggish and unemployment stubbornly high -- but it has been for a decade. There is no reason for the markets to suddenly panic.
Finding Its Feet
The depth of Europe's bear market tells us two things: that European bourses remain heavily dependent on a small number of mega-cap stocks and that despite the creation of the single currency, Europe remains psychologically dependent on the U.S. It has yet to find its own feet.
Europe is going through a blue chip bear market, but the U.S. is going through a new economy bear market -- and that explains a big part of the difference between the two continents.
In the U.S., it is the new economy champions such as Enron, WorldCom and the lost legions of dot-coms that have hit the worst trouble. They flourished briefly then vanished almost as soon as they appeared. The old economy heavyweights soldier on. Some have dropped a few million on Web ventures, but with the exception of Time Warner Inc., which rushed into a foolish merger with America Online Inc., none have been fatally wounded.
Going Pop
In Europe, established blue chip companies went pop when the bubble burst. All the big national telecommunications companies paid silly prices to expand out of their domestic markets and ruined their balance sheets.
Most paid the U.K. and German governments tens of billions of euros for 3G mobile phone licenses that have turned out to be worthless.
Likewise, blue chip companies rushed for new economy assets. In France, Vivendi squandered the wealth built up through a century as a utility buying film and Internet businesses. In Britain, GEC, once one of the U.K.'s biggest companies, renamed itself Marconi Plc, bought a series of telecom equipment businesses, and is now worth next to nothing.
The destruction of investors' money through over-ambitious acquisitions was far greater in Europe than in the U.S., and it was often old well-established companies that suffered most. Those companies make up a big chunk of each national index. Why is Stockholm's market down so much? Try looking up the Ericsson AB share price. As mega-cap companies have collapsed in value, they have dragged indexes down with them.
Bone Damage
The U.S. remains a more entrepreneurial economy. Change is driven by new companies. In Europe, it is driven by old companies transforming themselves. In the U.S., much of the fat of the boom has now been stripped away, but the skeleton of the economy remains intact. In Europe, the bone has been damaged. Lot of big, blue chip companies have blundered and hurt themselves. That is what Europe's bourses are reflecting -- and that is why they have performed so much worse than the U.S.
Europeans can be forgiven a degree of smugness over the collapse of the U.S. markets. The U.S. economic surge of the 1990s came with a lot of preaching and everyone likes to see the self-righteous come unstuck. But it would be a mistake to gloat too much.
Europe's bear market shows that its economy is still weak. Its big corporations are still making mistakes, and a slow- growth, high unemployment economy is always going to suffer most in a global slowdown. Europe should have been using this moment to break away economically from the U.S. That it hasn't shows just how much it still needs to be reformed. |
