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Quarter-End Insights

European Markets Await More Cues

European markets steadied in the third quarter, but underlying growth prospects remain worryingly weak.

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After the rough and tumble that European equities suffered earlier this year, market watchers will be relieved to see that Europe stocks mostly logged positive returns in the third quarter.

According to the MSCI Standard Index, as of Sept. 26, Germany equities led the region, logging positive returns of 14.6%, followed by France with 8.3%, and the U.K. with 6.5% gains. Even Greece, after hogging much of the spotlight earlier this year for all the wrong reasons, finally stabilized with a 1.1% gain.

However, there remains much to be cautious about, and maybe even worried over.

First, despite the encouraging growth for equities and an uneventful period compared with the tumultuous events of the preceding quarter, the September quarter seems to be ending again with uncertainty surrounding both Spain and Greece.

Second, recent data in the U.S., Europe, and Asia have renewed worries of a global economic slowdown. Data showed German business confidence fell for a fifth straight month, indicating that the European crisis continues to weigh on the continent's biggest economy. This closely watched survey is a leading indicator and provides signs of where the economy is headed in the next few months.

U.S. manufacturing also suffered its weakest quarter in three years after a decline in leading indicators the prior month. Manufacturing activity fell in China and Europe as well.

The Bank of Spain said earlier this week that the country's economy continued to shrink at a "significant rate" in the third quarter. Spain is currently in a recession as it suffers its worst unemployment rate since the 1970s. On Thursday, Spanish government officials said the focus would be on spending cuts and labor reform, and although Madrid has already seen violent protests given the austerity conditions attached to an international bailout, the government has little choice left due to ballooning regional debts that are hampering its refinancing efforts.

Workers have also taken to striking again on the streets of Greece for the first time since the new government came to power in June. A late-September protest was against new spending cuts of more than 11.5 billion euros, a pre-condition to receiving the next tranche of bailout funds, without which Greece would face bankruptcy.

Equities Recover Lost Ground
A number of stocks recovered from steep drops in the previous quarter, making up lost ground.

Among sectors that stood out during the period, the IT industry clocked a respectable 11% gain, with software and services companies rising 17.5%. Computers and peripherals gained over 20%. German enterprise applications firm SAP AG (SAP) rose more than 20% during the quarter, while Cap Gemini SA (CAP) gained about the same.

Among semiconductors, Infineon Technologies (IFX) was down about 7%, but ARM Holdings (ARM) gained about 18%.

In financials, banks advanced about 14% on average. BNP Paribas (BNP) and Societe Generale (GLE) added about 35% each, while Credit Agricole (ACA) jumped a whopping 70%. Commerzbank (CBK), HSBC Holdings (HSBA), and Standard Chartered (STAN) were little changed in comparison, while Deutsche Bank (DBK) gained a relatively modest 10%.

Materials and resources underperformed, as data out of China pointed to a slowdown in Asia's largest economy. Materials were up about 9%. Metals and mining shares rose just 4%. British miner Anglo American PLC (AAL) sank 9% while African Copper PLC (ACU) was down 20%. BHP Billiton (BLT) was up about 12%.

Energy stocks also ran out of steam with the sector up only about 6%. The health-care sector also turned in a lackluster performance, up about 9%.

Among consumer discretionary items, automobiles and components were up about 11%. The performance was varied with a few companies racing ahead. Renault SA (RNO) was up 25%, while Peugeot (UG) backed off about 16%. Volkswagen AG (VOW) was up 15% while Daimler (DAI) gained 14%.

Overall, consumer discretionary stocks gained almost 10%.

Rouhan Sharma does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.