Some in London are lookin 2001 positiv, etc.
London off lows, still in the red
Telecoms and technology weighed down by Nasdaq fall
By Vince Heaney, FTMarketWatch 11:16:00 AM GMT Dec 21, 2000
LONDON (FTMW) -- London's techs bounced up from their lows in mid-morning trade but were still in negative territory. Blue chips traded in the red, but were also off their lows.
The FTSE 100 index [UK:1805550] traded 0.7 percent lower at 6,131.9 and the FTSE TechMARK index [UK:1859502] traded 1.4 percent lower at 2,508.4 in mid-morning trade. See pan-European market report
Internet software company Autonomy [UK:AU] led the list of large-cap losers down more than 6 percent.
Not much cheer
"There's not much cheer, but that's got to be put in context," said Richard Davidson, equity strategist with Morgan Stanley Dean Witter in London.
"There's still some good news out there, interest rates will be cut next year," he said.
Investors in Europe are hoping that stock markets on this side of the Atlantic can de-couple from the weakening U.S. market. Analysts highlight the better outlook for European growth compared to the U.S. next year.
"The U.S. cycle will be deeper than Europe's this time. In the past Europe has tended to follow the U.S. into recession, 6 to 12 months later, and has seemed unable to avoid it," said Sharon Coombes, European equity strategist with HSBC in London.
"This time we are arguing for an exception. European growth will slow towards trend next year - around 2.5 percent for the whole year, but the U.S. will have a technical recession (defined as two consecutive quarters of negative growth)," she said.
However, Europe may find it tough to break free of U.S. influence. MSDW's Davidson believes that sentiment from the U.S. will be the deciding factor. See European markets year-end special
See London markets year-end special
U.S. warnings hit telecoms, Reuters downgraded
U.S. telecoms operator and Dow Jones component AT&T [US:T] became the latest company to issue a fourth-quarter revenue warning after the U.S. close. It also cut its dividend by more than 80 percent. It is reported that telecoms equipment maker Lucent technologies [US:LU] will take a $1 billion charge for cutting jobs. See more on Lucent
Back in London, British Telecom [UK:BTA] dropped 3.2 percent, telecoms systems testing firm Spirent [UK:SPT] lost 3.1 percent and business telecoms operator Colt Telecom [UK:CTM] dropped 1.6 percent.
Global information provider Reuters [UK:RTR] fell by 4.5 percent after Goldman Sachs downgraded the share from "recommended list" to "market out-performer".
Nasdaq slumps 7.1%
The tech-rich U.S. Nasdaq index [US:COMP] ended Wednesday down 7.1 percent at a new 21-month low, and is 42.7 percent down year-to-date.
Chip stocks were hurt early, but bounced off lows, after the world's No. 3 chipmaker, Chartered Semiconductor [US:CHRT], warned that it may cut its 2001 sales and profits forecasts. See more on Chartered
U.K. chip architecture firm ARM Holdings [UK:ARM] dropped 2.7 percent, Irish- based chip architecture company Parthus [UK:PRH] shed 4.1 percent and chip maker Filtronic [UK:FTC] lost 3.2 percent.
Bubble burst, but growth story intact
Forecasters upbeat about market revival in 2001
By Vince Heaney, FTMarketWatch 7:33:00 AM GMT Dec 20, 2000
LONDON (FTMW) - The first year of the new century saw a spectacular popping of the new economy stock market bubble. But analysts see reasons to stick with the new economy growth story and are recommending moving back into technology sectors later in 2001.
"This was the year in which investors became reacquainted with the concepts of greed, fear and risk-adjusted returns," said Merrill Lynch in a recent research note.
Hindsight is a powerful tool, but in the words of Bill McQuaker, equity analyst with CSFB in London, "first quarter 2000 was a period in which people didn't care about valuations in any respect, or were buying without even knowing what a valuation was".
As a very graphic illustration of the extent of the European tech stock collapse this year, take a look at the comparative chart between the Dax 30 [DE:1876534] and the Neuer Markt [DE:1809455] From outperforming the Dax by almost 80 percent in March 2000, the Neuer Markt now under performs the main German index by more than 40 percent. See interactive chart for DAX/NeuerMarkt.
"Traditional stocks have come down so much. I don't see the need to buy Neuer Markt stocks when I can buy Nokia cheaply," said Carsten Gerlinger, a fund manager with DG Bank in Luxembourg.
" The tech bubble has burst -- but next year you have to keep an eye on quality -- on the Neuer Markt not everybody will benefit from an upturn," he said.
Look out below!
German media company EM.TV & Merchandising [DE:568480] is a good example of the trend in 2000. The shares started the year around €60 and quickly doubled to 120 by February. They have been in a steep decline ever since and recently traded at €6. The company is now looking for a buyer. See more on EM.TV
In the internet sector French free ISP company Liberty Surf [FR:007508] launched in March around €50, quickly rising to almost €80, before embarking on a steep slide all the way down to a recent low of €10.
In the European telecoms sector global networking group Equant [FR:012701] saw its shares rise from €110 to €140 at the start of the year. It's been downhill since February, with shares trading recently on the year's lows around €32, despite France Telecom [FR:013330] buying 54 percent of the company in November. See interactive chart for Equant
Babies and bathwater
The bursting of the tech stock bubble doesn't mean investors should throw the baby out with the bathwater and give up on the new economy story.
In its latest forecasts for the coming year Schroder Salomon Smith Barney suggest the down move has gone far enough.
"The move in government bond yields and weakness in equity markets has left the equity market looking oversold," said Schroder strategist Mark Howdle in a recent research note.
Merrill Lynch is thinking on similar lines. In its forecasts for 2001 the company states that European and U.S. equities have already priced in a "hard landing" style slowdown for economic growth.
The case for growth stocks
CSFB's McQuaker puts the case for continuing to believe in the new economy in a recent research note.
"Since 1991, the European economy as a whole has grown at around 2 percent per annum on average. The new economy, in contrast has grown almost 4 times as fast," he states.
"Given the importance growth has for longer term equity returns, we believe these differences, in themselves, give strong support to the case for investment in the new economy," writes McQuaker.
Creative destruction
Some commentators suggest that the shake out in the new economy in fact will lead to a stronger economic structure in the future.
"The agony in parts of the tech sectors is a reflection of the process of creative destruction," said Giles Keating, global strategist with CSFB in London
This process is the cycle by which rapid growth in new sectors leads to over-investment and excessive competition, with some firms going out of business or merging. The end result is more heavily capitalised and secure firms operating in a less competitive environment - phoenixes rising from the ashes.
Merrill Lynch's Internet analyst Peter Bradshaw agrees. In his forecasts for 2001 he sees further consolidation in the internet sector, a trend borne out by the recent Wanadoo [FR:012415] takeover of U.K. ISP Freeserve [UK:FRE]
Bradshaw's conclusion is to "expect a handful of strong companies to arise from the wreckage."
Rally in 2001?
So, if we shouldn't give up on new economy growth and consolidation is ultimately a good thing, what is 2001 likely to hold for investors?
"With risk aversion high, cash levels high and valuations looking good for equities, we are fundamentally bullish about the outlook for equities over the next six months in Europe," said Mark Howdle and Niall Mcleod of Schroder Salomon in a research note.
With positive catalysts coming from an anticipated easing of U.S. interest rates, and an expected further fall in oil prices - already 30 percent off their highs- Salomon see a 20 percent rise in European equities by April 2001. They see a full year rise of 26 percent next year. See more from Schroder Salomon
Merrill Lynch is also upbeat about prospects for next year. Senior international economist Michael Hartnett is looking for a 50 basis point cut in interest rates from the Federal Reserve and the European Central Bank.
"Europe's stock markets have rallied 29.2 percent on average when monetary policy is easing in the U.S. and Europe," said Hartnett at a recent press conference.
While not going so far as to forecast such a large rise in markets for next year, Merrill are looking for "high single to low double digit" market growth in 2001. See more from Merrill Lynch
Defensive at first
With the current economic environment still negative - witness the on-going process of fourth quarter earnings and profits downgrades the analysts are recommending a defensive posture for a while longer.
Plum Shipton, European equity strategist with Merrill Lynch in London suggests investors should focus on stocks with robust and visible earnings growth. Stocks seen as fulfilling these criteria are financials, tobacco, food and drink and oils.
Dutch retailer Ahold Nv [DE:851287] is one of Merrill's defensive picks on their global focus list for 2001.
Howdle and Mcleod of Schroder Salomon believe that until confidence returns to the tech/telecom sector "money is relatively safe in pharma". European pharmaceutical companies Schering Ag [DE:717200] and Novartis [DE:904278] appear in Salomon's European model portfolio.
Move back into growth sectors later
HSBC in London have been maintaining a defensive stance for a while. Despite a house view on U.S. economic growth that is at the negative end of the spectrum HSBC are looking to move partly back into growth sectors next year.
"It's unusual for defensive sectors to rally (against the market trend) for a long time," said Sharon Coombes, European equity strategist with HSBC securities in London
"As we move through the first and second quarter next year we are looking to reduce the overweight position in defensives and put more money back into growth stocks," she said.
When growth in the economy is slower, people are prepared to pay an additional premium for growth stocks," said Coombes.
Tech stock picks
Merrill Lynch also suggests moving back into tech sectors as 2001 progresses - specifically, once U.S. rate cuts appear more imminent than at present.
In the semiconductor sector, which has been troubled by numerous recent profit warnings in the U.S. and broker downgrades of European stocks, Merrill is more upbeat for the medium term.
"Excess inventories and reduced capital spending plans are certainly problematic," write Merrill in a recent research document.
"However, we see little evidence to support a multi-year downturn scenario."
STMicroelectronics [FR:012970] is a favoured buy.
"STM is a low P/E (19 times 2001 Estimated earnings) semiconductor stock with end-market exposure tied to the growth drivers of the decade," Merrill state. These sectors include wireless, digital TV and set-top-boxes, and smartcards.
STM also features on the Merrill Lynch global focus stocks list.
The telecoms sector is also seen as attractive.
"The talk about the 3G disaster is an exaggeration illustrating the general (negative) mood," said DG Banks Gerlinger.
"We are overweight in telecoms -- Vodafone [UK:VOD] has the best strategy," he said.
"For stocks such as Deutsche Telekom [DE:555750] and Dutch telecoms company KPN [DE:890963]downside risk is limited. I also like French telecom equipment maker Alcatel [FR:013015] -- there's a real chance for positive surprises," he told FTMarketWatch.
In the software sector Merrill favour France's Business Objects [US:BOBJ] [FR:402625], a leading provider of e-business intelligence.
"The company is well positioned to capitalize on the emerging analytical applications market through its Ithena subsidiary," said Merrill Lynch in a research note. The company is seen as benefiting from a favourable competitive environment, and remains hedged against euro weakness with much of the cost base in France.
Merrill Lynch is rather more cautious on the European Internet sector, believing that valuations, for the most part, are too high.
The upside is that after recent consolidation in the sector it is easier to pick the eventual winners. Among Merrill's expected survivors are T-Online [DE:555770] and Wanadoo [FR:012415]
With the festive shopping season upon us DG Bank's Gerlinger had one final stock tip.
"Hugo Boss [DE:524550] success is due -- Men never go shopping alone, they always take their wives -- so if men have done well with them for years, their wives are likely to get curious as well -- the shares are not expensive. There's a lot of upside potential."
Vince Heaney covers markets for FTMarketWatch in London. |
