European equities

January 2012 (covering December 2011)

European equities ended December slightly lower after weakness in the first half of the month was countered by a better second half. Another EU summit, at which the core decision was to strengthen fiscal discipline, failed to inspire markets, while Standard & Poor’s and Moody’s placing eurozone countries on watch for potential rating downgrades also weighed on sentiment. Better than expected Spanish and Italian bond auctions, combined with upbeat economic data in Europe and the US, underpinned European stocks as they staged a late rally into year-end. Healthcare was the best performing sector for the month while technology, telecoms and utilities sectors underperformed the market.

ECB president Mario Draghi signalled that the central bank would not be stepping up bond purchases, while Germany rejected combining the current EFSF and permanent ESM rescue funds. However, this month’s ECB meeting did bring a second interest rate cut. In addition, it instigated very significant moves to lessen tensions in the bank funding market, namely the halving of ECB’s reserve requirement, expansion of allowed collateral for repo operations and the introduction of a 36-month Long Term Refinancing Operation (LTRO) facility. The ECB said that 523 banks took advantage of this facility and provided some encouragement that banks’ liquidity needs were being amply met. The €489bn allocation was much bigger than the €200bn to €300bn anticipated by some commentators. 26 (out of 27) EU members voted for fiscal compact at the EU summit.

Elsewhere in macro news, Italy’s Q3 GDP figures added to evidence that the economy has probably already re-entered recession, despite the fact that the fiscal squeeze introduced by new president Mario Monti there has barely started. After registering the strongest growth in the currency union in the first half of the year, the Irish economy contracted by 1.9% in Q3. A very sharp property-related drop in investment (20.9% q-o-q), a fall in consumption and slower growth in exports explain the downturn. Germany provided some more positive news with its manufacturing industry contracting less than expected and ZEW and Ifo surveys coming in ahead of expectations.

In corporate news, shares in Spanish fashion retailer Inditex advanced. Q3 profit climbed 6.2% as the company added stores in Asia and expanded its e-commerce range for Zara and other brands. Elsewhere, shares in German healthcare firm Bayer had a strong second half of the month as the company said four of its medicines in development may contribute a combined €5bn to annual revenue. Telecoms firms Telefonica and Telekom Austria both cut their dividends this month. Telekom Austria cut the minimum dividend it will pay for 2011 and 2012 by half, citing an adverse economic environment. This came only a couple of days after Spain’s Telefonica cut its dividend for the first time in a decade. Despite the cut, the dividend is still over 9%.

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