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European equity markets are expected to post single-digit returns over the next year despite valuations slumping to their lowest point in the last decade, according to a 2008 Market Outlook report published by Standard & Poor’s Equity Research. The recent mini-rally is expected to subside and investors are likely to remain defensive until the Summer, with an estimated three quarters of total mortgage-related losses yet to be disclosed by the major European and U.S. investment banks. For a full copy of the report, 2008 Outlook: Expectations Mirror The Seasons – A Cold Winter First, please contact your local media contact below.
“We believe European economies are entering a period of heightened uncertainty with headline inflation soaring due to higher commodities and oil prices, and external growth constrained by ever-appreciating exchanges rates against the dollar,” said Robert Quinn, European equity strategist at Standard & Poor’s. “The consequences of credit market dislocation will continue to be felt for some time and the resolution of the sub-prime situation will depress the performance of financial stocks well into the second quarter.”
In Europe, Standard & Poor’s Equity Research forecasts the S&P Europe 350 index to increase by 7% over the next year to close at 1,600 on December 31, 2008, and prefers large-cap stocks with low leverage and exposure to emerging markets. The Information Technology sector enjoys the greatest exposure to emerging markets, followed by Materials and Consumer Staples. Conversely, sectors which are uncomfortably overexposed to the U.S. slowdown are, in order, Healthcare, Consumer Discretionary, Commercial Services and Utilities.
Mr Quinn said recent market discussion has centred on the extent to which economic growth in Asia and emerging markets can compensate for the inevitable slowdown in the U.S., where Standard & Poor’s rates the probability of a recession in 2008 at 40%.
“Although decoupling has been a popular and much discussed theme, it would be difficult to imagine global growth remaining impervious to a severe US slowdown or recession due to weak domestic demand. In fact, we argue that recoupling would be a more accurate proposition if we believe the world is more tightly inter-linked through financial and trade flows, than ever before. We are not turning negative on emerging market growth but are instead simply presenting such markets as providing a balance to rather than acting as pillars of the global economy.
Standard & Poor’s European Economics team has forecast Eurozone economic growth of 2.1% in 2008, slowing from 2.6% in 2007. Europe’s economic slowdown is expected to reverse in the second half, with the UK, Germany and France recovering most strongly. The UK economy will suffer more headwinds than any of its European peers, apart from Switzerland, due to its greater dependence on the financial sector. The Euro is expected to continue to strengthen against the USD to EUR/USD1.60 by the end of the second quarter.
