European shares edge off peaks, banks are under pressure

European shares edged off five-year highs yesterday, with renewed concerns about ongoing problems facing banks sparking a wave of profit-taking in the second best-performing sector of the past month.

An upcoming rights issues at Germany’s Commerzbank, which is expected to be at a steep discount, and bearish comments about Standard Chartered from influential short-selling firm Muddy Waters pushed the STOXX Europe 600 Banking sector 1.3 per cent lower.

But losses in the broader market were limited, with investors seeking to take profits on the recent gains partly offset by those looking for buying opportunities on any dips.

The FTSEurofirst 300 index closed 0.2 per cent lower at 1,230.12 points, not far off a five-year high of 1,231.05 points hit on Friday.

“They’ve had a strong few weeks but if you look at Europe relative to the other major equity markets, like US and Japan, they remain the laggards, so I don’t think there is too much exuberance built into the markets,” said James Buckley, head of European equities at Baring Asset Management, who is overweight on financials and healthcare.

Others were less upbeat about the region.

Stewart Richardson, partner and CIO at RMG, said while central bank stimulus may prevent a near-term slump in European equities, they are likely to keep underperforming global peers.

“Europe is in recession, the revenue outlook from the recent reporting season has been disappointing and we struggle to see where the growth is coming from in the next quarter to two to three,” he said.

Valuations offer a mixed picture. On the one hand, eurozone blue-chips look cheap in absolute terms, trading on just 15.5 times earnings, against Dow Jones Industrials on 16.4 times and Japan’s Nikkei at 24.5 times, according to Thomson Reuters StarMine.

However, the eurozone is the only one of the three main markets looking expensive relative to the average of the past 10 years.

Among individual stocks on Friday, Commerzbank was the biggest faller, down 4.7 per cent ahead of a €2.5 billion share sale.

“To succeed, the rights issue needs to be at the biggest discount that the government will tolerate, the placing needs to be done with clear headroom over the rights subscription price, and needs to be covered well enough that the stock trades well in the aftermath,” Simon Maughan, head of research at Olivetree, said.