European shares edged lower yesterday, with France underperforming after a rating downgrade, although many investors felt increasing signs of a world economic recovery would support equities in the longer term.
The pan-European FTSEurofirst 300 index, which hit a five-year high of 1,316.42 points on Thursday, slipped back to close down 0.1 per cent at 1,295.17 points although the index marked out its fifth straight week of gains.
France’s CAC-40 equity index was the worst-performing major European market, falling 0.5 per cent after credit rating agency Standard & Poor’s (S&P) cut its rating on France by one notch to AA from AA+.
The decline on the French market meant European equities underperformed gains elsewhere in the UK and the US.
Andrew Arbuthnott, head of large cap European equities at Pioneer Investments, said the France downgrade and the European Central Bank’s decision to cut rates on Thursday showed lingering concerns over the euro zone’s economy, which is still dealing with the effects of a sovereign debt crisis.
“Despite rallying initially after the ECB rate cut, markets appear a little cautious today as the more dovish rhetoric of the ECB has prompted concerns over the recovery in growth in the euro zone,” said Arbuthnott.
By contrast, US jobs growth unexpectedly accelerated in October. The stronger data was likely to bring forward the time when the Federal Reserve would start to scale back a bond-buying programme aimed at boosting the economy, which has also lifted equity markets.
However, Berkeley Futures associate director Richard Griffiths felt some investors were now starting to focus more on the underlying backdrop of an improving global economy rather than the Fed’s future monetary policy.
“Maybe, the market is just moving more towards the fundamentals of the actual economy,” he said.
Arbuthnott and others were also upbeat on prospects for equities in 2014.
Barclays equity strategists felt an acceleration in corporate earnings growth would contribute to a 27 per cent return for the pan-European STOXX 600 index in 2014. The STOXX 600 is up by around 15 per cent since the start of 2013, while the FTSEurofirst is up by 14 per cent.
German investment bank MM Warburg also felt the country’s DAX equity index, which has already hit record highs this year, was on track to hit the 10,000 point level.
The DAX closed flat at 9,078.28 yesterday.
“We remain quite positive believing the ECB has confirmed their willingness to ‘do what it takes’ to promote growth in the eurozone,” said Arbuthnott.
“We believe 2014 will see an increase in profitability across the region and this should translate into positive performance for European equity investors,” he added.