Europeans distrust punch-drunk U.S. investors
By Suzanne Miller and Gareth Vaughan,
CBS MarketWatch
Last Update: 3:32 PM ET Mar 18, 1999
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LONDON (CBS.MW) -- Punch-drunk. That's what Europeans think
about the U.S. investors who sent the Dow briefly through 10,000.
Like or not, European stock markets are captive to
the whims of Wall Street. Much of the Dow's good
fortune has been bound up with one of America's
favorite past-times -- getting rich by investing in the
stock markets. This grates on Europe's nerves.
In Europe, personal dabbling in the markets is by
comparison almost unheard of. And it's this
American proclivity which makes European
investors particularly nervous.
Numerically challenged
This was definitely on the minds of European
investors when the Dow hit the magic 10,000
milestone Tuesday. Unlike the New York Stock
Exchange trading floor, where the moment was met
with cheers, traders on the floors of European
bourses watched with apprehension. In fact,
profit-takers have been having a field day with
European stocks since the Dow record.
World Markets
"The normal investor reaction over here would be, 'What's the difference
between 9,900 and 10,000?' Not much," said Richard Jeffrey, chief
economist with Charterhouse Tilney in London. See Dow 10K story.
But in reality, "people recognize that the greater factor in the Dow is the
personal market -- that makes psychological thresholds more important.
So there's more nervousness here," Jeffrey said. "There's the danger that
there's a behavioral impact at reaching 10,000," he added.
Worries that the Dow ($DJ) as well as the FTSE are overvalued have
been around for months and months now. And yet most investors are
afraid to be the first one to jump ship; so the market has just kept
steaming. So where does it make sense to put your money?
Play it safe
Some argue that it's best to play it safe and keep money in both of the big
markets. "Both regions have attractiveness.While the U.S. economy
powers ahead encouraging investors, European economic growth still
seems fairly well assured. It's still wise to balance investment and not put
all your eggs in one basket," said Martin Evans, London-based head of
equity research at Sutherlands Ltd.
Investors also don't know what scenario will yet play out: will for instance
the U.S. bubble burst, will Europe's sluggish growth turn into the next big
growth opportunity, or will the U.S. economy continue to power ahead?
Some are inclined to think the Dow's brief flirtation with 10,000 is a clear
signal that U.S. growth is as robust as ever, and still casts a long shadow
over Europe. "It highlights strong U.S. growth and earnings which
contrasts strongly with Europe. The U.S. market is probably a better
place to invest than Europe at the moment," said Ian Harnett, director of
pan-European strategy at BT Alex. Brown in London.
Bargains in the shadow?
On the other hand, that long shadow may yet hide a few bargains. And
there are still plenty of fears that the U.S. stock market is a bubble ripe for
bursting. "It's [Dow] had such a move it needs consolidation because the
background is not improving, - companies are continuing to warn on
earnings. It's due for a correction and it's difficult to see it making
short-term gains from here," said Colin Bond, London-based trader at
Bernard L. Madoff.
Even though the benchmark FTSE 100 index hit its own closing high of
6,335.7 on March 11, many feel that the Dow is still 10 times more
overvalued. "The U.K. market is the most attractive place to invest on a
global scale," said Khuram Chaudhry, U.K. equity strategist at Merrill
Lynch's London office. He argues that with high valuations in the U.S.,
bond yields increasing, and the possibility of a hike in interest rates, the
U.K. market is a better choice.
"U.K. [interest] rates are trending down and valuations are lower than in
the U.S. Sectors that look attractive through valuations [in the U.K.] are
paper and packaging, construction, building materials, industrial cyclicals,
and engineering," Chaudhry said. He said the five cuts in the British base
interest rate during the last 6 months to 5.5 percent should bolster these
areas.
Chaudhry said that the pharmaceutical and telecom sectors, which have
been outperforming the rest of the market globally, now look more
attractive in the eurozone than the United States. Sharon Coombs,
European equity strategist at HSBC Securities, points out that "nearly all
U.S. sectors are more highly valued than Europe."
Scope for eurozone growth
Europe's stock watchers are also quick to point out that there's more
scope for growth in eurozone equities, especially the underdeveloped
German market, which has underperformed the rest of Europe by roughly
10 percent this year. International Indexes
Indeed, all of Europe now holds the nascent
promise that the U.S. has now long taken for
granted -- the injection of private investor money.
European citizens, long taken care of by socialist
systems, are being weaned off government
subsidies and are being forced to fend for their own
retirements.
"We're seeing the rationalizing of German
companies, Deutsche Telekom (DT) has been
privatized and there are moves in pensions to
come. People have tended to invest in bonds but
this is changing and there's a huge scope for money
to flow into equities," said Rob Haywood, London-based senior
economist at Bank of America.
It almost sounds like another bubble in the making.
Suzanne Miller is London bureau chief for CBS MarketWatch.
Gareth Vaughan is a reporter for CBS MarketWatch.
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