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Most Markets Set to Drop; U.S. May Bounce
Updated 3:26 PM ET September 23, 2001
By Jeffrey Hodgson and Chelsea Emery
LONDON/NEW YORK (Reuters) - With the world on tenterhooks awaiting news of a military response to the U.S. terror attacks, most global markets seem set for another round of heavy losses in the week ahead, but some analysts anticipate a short-term bounce for slammed U.S. equities.
European stocks are expected to extend sharp falls, on fears of a global recession and steep dive in corporate profits. But analysts based in the United States see a modest rebound for U.S. equities as long-term investors snap up drastically discounted stocks, on optimism the world's largest economy will regain strength in 2002.
Still, the pros say the bounce may be short-lived as worries surrounding possible military retaliation and the economic outlook weigh.
Bonds may perform little better, as the market grapples with the prospect of a jump in government borrowing. Analysts also say capital will continue pouring into traditional safe havens, ranging from cash and short-dated bonds to gold and the Swiss franc.
``What we're staring into now is a very negative scenario of weaker growth, deeper gloom on the economic front and more bad news before we can see glimmers of light,'' said David Brown, chief European economist with Bear Stearns in London.
``The first priority for investors at the moment is to maintain defensive positions and preserve capital. That's going to continue to mean more stock market liquidation.''
But U.S. strategists say the United States' strong capital markets and corporate flexibility may provide a cushion that is lacking in some European countries, and adds to hopes the lagging U.S. economy will recovery quickly.
The United States has ``flexibility, compared to Europe,'' said Peter Gottlieb, who is based in Chicago and helps manage $500 million for First Albany Asset Management. ``We're undertaxed, compared to them. Our corporations can move more quickly -- we can lay off people, reorganize, buy back stock. In Europe, there's more unionism and more government bureaucracy.''
Gottleib said U.S. investors are looking ahead.
``We'll see some people willing to take the long-term perspective and come in here and get some values.''
At the same time, though, market watchers warn any bounce may not stick beyond the week, as fears about future possible attacks, the dimming corporate-profit outlook and the drag from slumping global economies weigh heavily.
``With layoffs going on, it's going to make the economic recovery look grim,'' Peter Cardillo, director of research for Westfalia Investments, said. ``We need to see a clear picture of the outlook. But I'm confident we'll have a technical rebound in the next few days. The market is oversold.''
Cardillo's company is temporarily based in Great Neck, N.Y., after Westfalia's offices adjacent to the World Trade Center in lower Manhattan were destroyed two weeks ago.
BAD NEWS
The sheer degree of last week's selling has left many searching for a bottom. U.S. shares shed 14 percent by Friday's close, ending their worst week since the Great Depression. European stocks fell to October 1998 levels.
Analysts said the market may be oversold but that does not mean more losses are not possible. The likelihood of recession, mounting layoffs, reduced profits and the prospect of open-ended U.S. military reprisals remain a toxic mix longer term.
Bank of England Governor Sir Edward George added to the gloom Sunday, saying economic recession in Britain could not be ruled out in the short term.
``Investors ought to be focusing on not 'return on capital' but 'return of capital.' Be happy if you can get your original capital back. Risk aversion is going to be paramount,'' Kirit Shah, chief strategist with Sanwa International in London, said.
``In times like this it's very tough to find strong alternatives. Really cash is king.''
Shah and others said they saw potential for a bear market rally if there were some event to relieve investors. This could range from limited military attacks to a surprise Federal Reserve rate cut.
``I hate to say this, but if they bomb, the market will rally,'' said Louis Navellier, who oversees $6 billion for Navellier & Associates in Reno, Nevada.
That's because investors will finally see what action the United States has taken and can prepare accordingly, he said. In other words, the action will remove some uncertainty from the markets.
Still, Shah said against a background of a global economic
slowdown, investors are likely to view any rise in stock markets as a selling opportunity.
``The best thing you could do at the moment would be to sell equity and hold cash. But we can't do that,'' Standard Life's head of European equities Stuart Fraser said.
``It's going to be grim because nothing's happened and all we have to focus on is the bad news coming out from companies -- and that's not going to get any better.''
SAFE HAVEN PLAYS
Given the outlook, European and Asian analysts forecast a continuation of last week's themes. These included the sale of any investment with a hint of risk, including emerging market bonds and currencies and possible high-yield debt.
The destination for this capital is likely to remain safe plays like gold, which some think could top $300 an ounce, short-term government bonds and cash.
On the currency front, strategists said the dollar and possibly the euro remain vulnerable, while the yen could benefit as Japanese investors repatriate savings from abroad. The Swiss franc, which is up more than 8 percent since September 11, remains the currency of choice.
As for stocks, experienced investors seen content to wait before making any big moves.
``We have started looking for anomalies. Some stocks are discounting shrinking profits for the next 10 years. That might be right but it seems unlikely,'' Standard Life's Fraser said.
``We could be seeing the best buying opportunities for 10 years but it may be mid-October before we find out -- it certainly won't be this Monday.''
But some U.S. analysts disagreed.
``I think we'll start to see a bounce,'' First Albany's Gottlieb said. ``There was a lot of bad news last week and (stocks reflect) future bad news. We'll start to see some bottom fishing and bargain hunting as panic selling abates.''
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