Bears continue to roar as European markets slump for a third year

EUROPEAN shares have been on the rack for three successive years and are on course to lose almost a third of their value in the last year alone, indicating the bear market has accelerated.

As a result investors are approaching the new year bloodied and bruised. But many analysts and investors are optimistic the three-year bear market will be halted in 2003, although worries about a war in Iraq and the outlook for company profits could delay any rebound until later in the year. “There are so many big question marks about the beginning of next year in Europe,” said Amanda Forsyth, a fund manager at Standard Life Investments.

“In the first half of the year we are up against quite a lot of things. We do have a war looming... the market’s going to struggle with a high oil price,” said Forsyth, adding sky-high oil prices could trigger inflation and stifle growth.

The FTSE Eurotop 300 share index has fallen 32% since the start of the year. Far from improving, the tumble has steepened from 18% in 2001 and 3% in 2000.

“As we look forward to 2003 it seems inconceivable that equities will deliver a fourth consecutive year of losses to equity investors,” strategists at investment bank Schroder Salomon Smith Barney said in a year-end review.

“However, the future remains uncertain and full of significant risk.”

The main risk is the threat of conflict in the Middle East, and SSSB rated the chance of conflict in Iraq as “likely,” which it said “makes it difficult to envisage a smooth period of economic recovery in 2003.” SSSB strategists said other risks to European economic growth next year are Germany’s battle with deflation, the UK’s housing boom, and the pressure from US dollar weakness on European exporters.

But the second half of the year could herald a tentative recovery, and some suggest it could happen earlier.

“Even the most bearish of bears are hinting that you’ll start to see real green shoots of recovery in the second half of next year,” said Forsyth.

Company results could provide the breakthrough as they meet or exceed earnings expectations that have settled at more prudent levels.

“What’s been happening lately is that companies have been trying to rein back. They’ve tended to try and prevent people from moving up forecasts just so they have something in hand,” said Forsyth.

Hilary Cook, director of investment strategy at Barclays Private Clients, predicted Britain’s FTSE 100 index will recover to 4,400 points by the end of 2003, up 14% from its current level of 3,854, which is down 26% since the start of the year.

And investment bank Lehman Brothers said it expected the UK stock market to rise 12% next year, adding that it did not believe there would be a “double-dip” recession in the global or UK economies in 2003.

But elsewhere in Europe the picture was less rosy. Germany’s economy is struggling against weak demand as unemployment bites and as public sector workers threaten to strike in January. German exporters have also been hit by the stronger euro.

“It’s a mixed bag out there. You’ve got parts of continental Europe still struggling significantly, such as Germany,” said Forsyth.