European stock markets closed the quarter ending September with small losses, down 0.4 per cent in local currency terms. Sector wise, energy, materials and pharmaceutical sectors outperformed, while utilities, banks and telecoms performed just ahead of the index.
The IT and consumer sectors were especially weak: consumer was hit by profit warnings from global consumer goods companies such as Coca-Cola and Colgate Palmolive; IT was hurt by questions over the strength of the pick-up in technology spend. Country wise, the Belgian and Norwegian markets performed well while the Finnish, German and Dutch markets performed worst. The big markets of the UK, France and Italy were flat.
European equities remain attractively valued both against bonds and historically. With strong earnings growth of 35 per cent now expected for 2004, and 15 per cent for 2005, this brings the forward price earnings ratio down to 13 times which, backed up by a dividend yield of 3.4 per cent, should also support valuation.
Europe’s economy is also being helped by an accommodative stance by the European Central Bank. The core European economies continue to have plenty of slack with little sign of any significant inflationary pressures.
Globally, the economy is showing signs of slowing after its improvement in 2003 and the first half of 2004. There is no doubt that a combination of the high oil price and rising US rates are likely to bite in early 2005 and this, coupled with an inevitable fiscal tightening in the US post the presidential election will surely slow the US economy in 2005.
US GDP growth estimates for 2005 have already been pared back from 4.4 per cent to 3.6 per cent and this process may have further to run in the short term, although continued expansion and not US recession is expected.
Consumer confidence, capital investment and corporate profitability in Europe have all continued to show considerable resilience in the face of all these threats and there is nothing, so far, to suggest that the bears will be proved right on the global economy for next year.
Stephen Watson, senior portfolio manager, international equities, Northern Trust Global Investments (Europe)
