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Market Update

UK favoured at expense of the Continent

European stockmarkets fell in April and inflation is becoming a bigger concern due to rising oil prices. The European Central Bank (ECB), however, left rates unchanged at its meeting on May 6th.

Sara Silano 20 May, 2004 | 5:39PM
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The MSCI Europe index lost 1.2%, in dollar terms, in April. Since the beginning of the year, the index is down 3.9%, as of May 18th. Thanks to defensive markets such as Britain and Italy, Europe as a whole performed slightly better than the global market over this period. The MSCI World index fell 2.2% in April and is down 3.1% so far this year.

A weak economic recovery, bad company news and rising oil prices are some of the reasons for the falling stockmarkets. Oil prices have soared, with Brent crude oil rising to nearly $38 dollar a barrel on May 17th. This is pushing up inflation and prices increased 0.7% in March in the euro-zone area, the highest rise since January 1999. Economists have increased their 2004 inflation estimates for the euro-zone to 1.7% from 1.6%.

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According to Jean-Claude Trichet, the president of the ECB, high oil prices are unwelcome as they have a negative impact on inflation. However, the current level of inflation is suitable as it is helping the economic recovery. For this reason, the ECB left rates unchanged at its meeting on May 6th. Analysts at Schroders are less optimistic. They reduced their euro-zone GDP estimates for 2004 to 1.5% because of consumer weakness. Schroders expect a rate cut in the summer.

Fund managers are, however, more positive on Europe than some of the other developed markets. According to the latest European Fund Trends survey, 12% of fund groups said Europe will be the best performing stockmarket over the next 12 months while only 4% favoured America.

Shares outlook

Gartmore, a fund group, said in a recent report: “We believe the outlook for the equity [share] market is moderately positive, driven by corporate earnings rather than economic fundamentals, but we are concerned that some valuations have become particularly stretched.”

News is mixed from companies in Europe. Shares in Alitalia, an Italian airline company, fell because of balance sheet problems. Nokia announced a 2% fall in sales in the first quarter, compared with expectations of a 3-7% increase. In April it was announced that Sanofi-Synthelabo and Aventis merged to become the largest pharmaceutical group in Europe and the third on a global basis.

Uncertainties regarding the stockmarkets in continental Europe made some investors review their underweight positions in British shares.

“We expect UK rates to rise over the course of the year reflecting the pace at which the global economy is expanding and the persistently high level of consumer debt in UK,” said Gartmore.

“However, we believe there is solid support for UK equities at this level, in part due to the prospect of further industry consolidation, and we have raised exposure” [to the country].
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About Author

Sara Silano

Sara Silano  is Editorial Manager for Morningstar Italy

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