|
Outlook for Euroland
by Taipan's European Research Division
After 1994, 1999 qualifies as the most disastrous year for investors professing to aim at safety. Bond investors weren't even able to earn their interest coupons. If you had bet on declining interest rates after the deflationary effects of the crisis in the emerging markets (especially Russia) and bought 10-year treasuries, 1999 earned you a loss of about 10%.
(For example, you would have been able to buy the 10-year German "Bundesanleihe" --deemed to be a bullet-proof conservative investment--with a nominal interest coupon of 4.75% in early 1999 at 107.82%. On November 5, however, that same "bullet-proof" paper would have been worth only 98.33%... a loss of about 10%!)
On the other hand, the highly speculative 5-year "Russlandanleihe" (Russian bond) with a coupon of 9%, would have generated twice that interest gain--plus a 50% gain in value!
Why this incredible turnaround?
First, there were massive increases in commodities prices. The price for crude oil doubled within 6 months!ÝThen, rapid growth especially in the fringe economies of the EU11 (i.e., Ireland, Portugal, Finland) triggered renewed fear of inflation. But it was only improvements within the economic juggernaut of Germany that caused a new interest rate policy. Only a 0.5% raise through the European Central Bank provided some degree of comfort...
Everything now depends on how the economy firms up in the year 2000.
Overall, we expect real economic growth in Euroland to oscillate between 3% and 3.5% (after only 2% in 1999).
This growth should be fueled by the distinct expansion of credit... which already is in the double digits. We also expect consumer demand to increase considerably.
Still, we believe the threat of inflation to be relatively small. The rate of inflation may increase slightly, but will remain below 2% (after 1.1% in 1999).
The potential for further increases in commodities prices appears to be small, and there are a number of factors which will provide relief. The liberalization of the electricity market, for example, has caused prices to decrease by about 30%. Telecommunications rates continue to shrink because of burgeoning competition. And even the retail sector will experience further pressure on prices due to increased competition and consolidation.
Merger mania
On the other hand, there are some arguments to be made in favor of the European stock markets. The potential for further mergers has not been exhausted by far. Prime candidates remain banks, insurance and telecommunication companies, as well as retail.
Furthermore, we don't expect cost structures to change dramatically: Unemployment rates of 10.9% virtually guarantee that wages will remain relatively stable. This will maintain productivity levels at relatively high levels. Because of the strong economic growth, we expect higher employment rates: Unemployment during 2000 will drop below 10%.
Corporate profits
For the European stock markets, we expect 15% growth in gains. Only Asia will have higher growth in 2000.
Because of the overall economic recovery, we consider cyclicals to be among the top publicly traded companies: chemicals, automotive, steel, and energy. These will be followed closely by telecommunications and technology.
Outlook for Germany
Germany will be the laggard in Europe's overall economic growth.
Since the Social Democrats and Greens took over the government from Helmut Kohl and the Christian Democrat/Free Democrats in 1998, all the lofty expectations of economic and social improvement have evaporated.
Each subsequent election--on local, regional, and state (Länder) level--is indicating a dramatic erosion in public support for Chancellor Gerhardt Schröder and his coalition government.
The long-awaited reform of corporate taxes has gone nowhere. What's left of tax reform are additional taxes, such as the "Ökosteuer" (or "Green" tax) and a drastic increase in oil and gas taxes.
Still, Germany will experience economic stabilization in 2000. After only 1.3% growth in 1999, we expect a robust increase to 3.5%. One of the driving factors for this growth is the increasing globalization of German companies--which has resulted in higher production and renewed trust in the economy despite all problems and criticism. The retail sector also has been performing strongly.
This will certainly be a positive influence on the German stock markets. We expect gains to be about 12% in 2000 (after only 5% in 1999.) Construction companies will be among the market leaders.
Outlook for France
The resignation of "Superminister" Dominique Strauss-Kahn (who was in charge of the economic and finance ministries) in the aftermath of a bribery scandal has embroiled France in heavy political infighting.
Yet economic developments signal that there's land in sight. Both overall consumer demand and developments in the export market are clearly above expectations.
For 2000, we expect economic growth in the range of 4%. The French markets have already reacted to these developments by posting new all-time highs. As a result, the French markets have pushed Germany to third position in market capitalization.
The expectations for corporate profits are fantastic. After a heavy 1999, we expect 12% for 2000, and 18% for 2001. This development should cement France as Europe's second-largest stock market.
Outlook for export markets is clearly above expectations
For 2000, we expect economic growth in the range of 4%. The French markets have already reacted to these developments by posting new all-time highs. As a result, the French markets have pushed Germany to third position in regard to market capitalization.
The expectations for corporate profits are fantastic. After 7% in 1999, we expect 12% for 2000, and 18% for 2001. This development should cement France as Europe's second-largest stock market.
Outlook for Italy
It's been disconcertingly quiet--not to say respectable--in Italian politics. In fact, it is so quiet and respectable, we don't believe we've seen a similar situation in the past century!
Despite lack of political scandal and obvious corruption, economic stability is not yet in the cards. Economic growth in 1999 was on par with that of Germany (at about 1.3%). We expect a recovery to about 2.8%. Still, Italy will be among the least stable economies in Europe.
We expect a reduction in VAT (or sales taxes) to provide a modest boost to economic growth and consumption.
Outlook for Spain and Portugal
Apart from Ireland and Finland, Spain and Portugal currently are the boom regions of Euroland.
We expect this status to remain unchanged in 2000. Private and retail demand remain high. But this already has triggered a slightly increased rate of inflation for Spain, which at 2.2% has the highest inflation rate in Europe. Which means that the upside potential for the Iberian economies has already been limited.
Outlook for Benelux
After pedophilia and food contamination scandals, the Belgian economy is on its way out of the woods. About two thirds of the country's industrial production consist of cyclicals, which should benefit from the overall recovery of the global economy.
The Netherlands are even better off. We expect economic growth of about 4%, boosted by strong demand and strong exports.
The Netherlands have a surprisingly low unemployment rate--we expect 2.2%!--without creating inflationary pressures.
|
