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Markets: Who let the bears out?
By CNN's Todd Benjamin and Abid Ali
LONDON, England (CNN) -- European equity investors would rather forget 2002 as stock markets fell for a third-straight year -- the first time that has happened in more than 60 years. The worst economic growth in almost a decade in the euro zone, disappointing earnings, corporate governance issues out of the United States, a lack of mergers and acquisitions and geo-political concerns all helped to undermine investor sentiment. The FTSE 100 benchmark index in London has lost almost a quarter of its value, the CAC 40 in Paris, the DJ Euro STOXX 50 and the much broader FTSE Eurotop 300 declined by a third. But Frankfurt's Xetra Dax, which at one point this year was down more than 50 percent, is ending the year about 38 percent worse off. Germany's high unemployment and structural problems could mean the economy heading back into recession. Michael Hartnett, Director of European Equity Strategy at Merrill Lynch, told CNN the markets would fair better next year compared to the "dismal" performance in 2002. Even so, he forecast the Dax will finish 2003 down about 5 percent at 2,900 -- it has recently been trading around 3,000. The CAC 40 is expected to end the year down 2,900, or 5.6 percent lower, the DJ Euro STOXX will also slide 4.9 percent over the next 12 months. Only the FTSE 100 is expected to eke out a gain of about 1.1 percent, according to Merrill Lynch estimates. Enormous repercussionsHugh Hendry, who manages the $250 million Odey Continental European Fund, said markets could decline for a fourth year. "I know that flies in the face of conventional wisdom but there is a better than even chance. That has enormous repercussions and a tremendous impact on the global economy; the man in the street can sit back and watch history in the making," he said. "The big issue is deflationary pressures and it is the U.S. Federal Reserve's job to make sure we avoid that scenario." (Full story) Hendry, whose fund has risen by about 5 percent this year amid slumping markets, believes the markets will retest October lows. He said the best place for money is in gold, government bonds and commodities. Geo-politics undermine confidenceJarrod Cahn, fund manager at Credo Capital, told CNN that he "had no real reason to be in the market at present" and would wait until February for a possible war with Iraq to start before considering investing. "I'm not in a hurry but there are a lot of great deals out there. But geo-political risks and poor retail Christmas sales could undermine that confidence," he said.
"But all eyes will be on the United States to drag the rest of the world out of the mire. The thinking is U.S. markets will grow 15-20 percent but we believe this to be unsustainable and are looking for 12-15 percent growth. "Of all the markets, we like the UK because we believe there is real value there. It hadn't rallied as high as the U.S. or other European markets during the boom period and the accounting regime is well managed, which lessens the chance of fraud, visibility in earnings and corporate earning are not good." But some key European strategists reckon that 2003 will be somewhat better than this year. "The bear markets finished with two lows of late July and early October," Richard Davidson, European strategists at Morgan Stanley, wrote in a note to investors. "No new bull market has begun, and we don't expect to see one in the next five years." Davidson expects stocks to rise 20 percent in 2003 and Ian Scott, the head of global and European strategy at Lehman Brothers, forecasts markets to generate total returns of 18 percent next year.
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