Three wise men and one crystal ball ...

Philip Sanders (PS) discusses the outlook for European equities in 1998 with Guy Monson, director of Sarasin Investment Management (GM), Francois Langlade-Demoyen, European equity strategist at Credit Suisse First Boston (FLD) and James Cornish, European market strategist at NatWest Markets (JC).

PS: Last year saw heady rises in European stock markets. Can this continue in 1998?

FLD: We expect overall gains of 15 per cent this year. We are optimistic about Italy and Spain where we look for 25 per cent gains and we like Germany and the Netherlands.

GM: We think markets will be marginally up but Asia and other concerns will prevent a repeat of 1997. The UK is our favourite on valuation grounds and Italy and Spain on convergence grounds. Germany we are most worried about.

JC: We are bullish but we don't expect such a splendid ride as in 1997. We like Italy and Spain because they will qualify for the euro and their interest rates have to fall. We dislike Germany and the Netherlands as we expect the deutschmark to rise against the dollar, hitting exports.

PS: The wild card is the impact of the Asian financial crisis on European companies. Which industries will be most affected?

GM: So far, the recovery in Europe has been driven by export growth. If competition intensifies, some earnings estimates in machinery and capital goods will not be met. Any assessment of Asia's impact on European equities has also to take what happens on Wall Street into account.

FLD: Europe will grow slowly overall with companies having no power to raise prices. Paradoxically, Asian competition should be the catalyst for European industry to consolidate further. This isn't good for jobs but it is for shareholders and will help support share prices.

PS: So far the Asian crisis has been good for Western markets as bond yields have fallen to a record low in the US. Deflation is talked about but unemployment is still falling in the US. Have we really eliminated the likelihood of a rate rise in US?

GM: A US rate rise is much less likely as the Asian disaster has changed the mix in US growth. Export growth will fall, affecting profits in some sectors, but inflation will fall and rates won't have to rise so the economy as a whole benefits. Bond yields will be lower than they would otherwise have been: some investors are worried that the risk is not overheating but recession. Lower bond yields will support equities. The moment when things get too toppy has been delayed.

JC: The problem with that is that you cannot on the one hand say growth is slowing and deflation is in the system, and on the other that profits won't suffer. I think there is the risk of a nasty squeeze if US wage inflation remains robust but companies' margins are squeezed. This is also a risk in Europe, but to a lesser extent.

The nightmare scenario for Western markets would be the Japanese situation where you have very low interest rates and no fear of inflation but companies have lost profitability. Bonds and equities part company as yields could fall absurdly low but equities are in a bear market.

PS: What impact will Asia have on European companies' earnings?

FLD: Some sectors are negatively affected, such as paper, chemicals and engineering, where companies will suffer from price competition. Luxury goods manufacturers will be hurt as consumption in Asia falls. But these sectors do not dominate European stock markets and other more important sectors such as insurance and healthcare are relatively immune. Analysts have not begun to downgrade estimates to reflect the problems so there is room for bad surprises.

PS: How much scope is there for corporate restructuring to drive up share prices?

GM: Restructuring has been a wonderful driver of share prices but investors anticipate future dividend streams very early on and a lot of the share gains last year reflected that. But it is not a fait accompli that restructuring will completely wipe out the risk of earnings downgrading as a result of Asia. The Asian fallout seems to be following a logical course. Companies with high earnings exposure in the Far East have fallen first, then mining stocks dropped, then engineering, then oil. Next is banking stocks, and some investors are not cautious enough about the impact on banks.

FLD: We assume the Asian crisis will be solved to a large extent in the next few months by a big enough bail- out to re-establish confidence in the region. The benefits of the restructuring process will outweigh the initial impact of the crisis.

PS: The UK is well down the road on restructuring. Which other countries will benefit most?

JC: Germany is where we have had a lot of talk and little action, such as the long saga of Krupp/Thyssen where after a year we still know nothing about what is happening. I will be convinced about German restructuring only when I see it.

GM: The Swiss have been the masters of restructuring in the last few years. The UBS bank merger shows the levels they are ready to go to to boost profitability. Italy and its financial services industry offer some very interesting situations and there could be good returns in France.

FLD: German companies have delivered more than they have been given credit for in enormous productivity gains, divestment of assets abroad and cost cutting. We have not seen the same effort in France, where old-style takeovers launched in the last few months have actually failed.

JC: EMU means that big companies will find Europe is a single country and will face much more price competition as a result. This will force the restructuring to continue. The whole of industry will be different in five years' time. Banks are in the headlines but the big food producers, capital goods industries and pharmaceuticals will also change. It is difficult to imagine a sector that won't be affected.

PS: Is the rise in the US dollar which has given such a major boost to European exports last year's story?

GM: The correlation of returns on German equities with the dollar/ deutschmark rate is very high. The dollar has returned to fair value in last 18 months but now it is being pushed up by the flight to quality and as Asian companies struggle to cover debt. We cannot pencil in a sharp increase from here.

JC: I am worried about the strong dollar. I see Dm1.60 by the end of the year, which will hit some markets worse than others.

FLD: We forecast a Dm1.85 rate. There is still a very strong incentive for every investor to hold US- denominated assets and this will support the dollar.

PS: What are your favourite stocks?

FLD: We like pharmaceuticals such as Astra and Novartis and utilities such as Iberdrola in Spain.

GM: We will concentrate on restructuring stocks such as INA in Italy and Mannesmann in Germany.

JC: We like to be defensive, so Telefonica in Spain, and we like restructuring stocks such as UBS. On the industrial side, Peugeot in France.

Copyright: IOS & Bloomberg

PROMOTED VIDEO
Arts and Entertainment
Sheeran arrives at the 56th annual Grammy Awards earlier this year
musicYes, that would be Ed Sheeran, according to the BBC
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

HR Advisor - 6 months FTC Wimbledon, SW London

£35000 - £40000 per annum + Benefits: Ashdown Group: HR Advisor - 6 Months Fix...

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
In pictures: Breathtaking results of this weekend's 'supermoon'

Weekend's 'supermoon' in pictures

The moon appeared bigger and brighter at the weekend
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor