European stocks are set for a long struggle

Financial Times – 01/03/10

It is still too early to buy European equities and the current correction phase could last a few more months or even quarters, says Ronan Carr, strategist at Morgan Stanley. He believes there are strong similarities between current market conditions and those seen in 1994 and 2004, when markets struggled and it was difficult to make money.

“First, these are ‘start of tightening’ years,” argues Mr Carr. “The Federal Reserve has not yet started hiking the Fed funds rate as it did in both 1994 and 2004. But we believe the tightening process has clearly begun – and combined with sovereign concerns, the cost of capital is rising.”

Second, he says, a growth scare is building. “Investors are questioning the strength and durability of the recovery and leading indicators are already rolling over.”

Mr Carr warns that equity markets could struggle for several quarters, but with a choppy profile. “The 1994 episode lasted 13 months with a 17 per cent peak-to-trough correction,” he says, noting that 2004 involved a two-quarter 8 per cent correction. Both 1994 and 2004 saw periods of alternating sell-offs, rallies and range-bound markets, he says. “In summary, markets tend to struggle in the face of higher uncertainty, lower growth prospects and tighter monetary conditions. We would wait until either fundamentals improve or our valuation and sentiment models give ‘buy’ signals.”


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