ING cuts outlook for Stoxx 600 this year

By Alexis Xydias  |   2008-6-12  |     NEWSPAPER EDITION

ING Groep NV strategists cut their 2008 estimate for the Dow Jones Stoxx 600 Index by 11 percent, forecasting that equities will remain near current levels after the European Central Bank suggested it may raise interest rates.

London-based strategists led by Simon Goodfellow reduced their year-end estimate for the Stoxx 600 to 310 from 350 in a note distributed yesterday. The pan-European measure, which is down 16 percent this year, closed at 306.61 on Monday, Bloomberg News said. ING cut its 2009 forecast for the index by 19 percent to 340.

Higher borrowing costs, surging oil prices and turmoil in credit markets will erode corporate profits, ING said. The Stoxx 600's 15-percent rebound from a two-year low on March 17 ended last month, and the index extended declines after ECB President Jean-Claude Trichet said on June 5 that the bank may lift borrowing costs in July to combat the fastest inflation in 16 years.

"The equity market cannot cope with rising interest rates on top of an oil shock and a credit crunch," the strategists wrote. "There is a high chance that the major indices in Europe will hit a fresh low for the year during the summer."

The Stoxx 600 has fallen 23 percent from a six-year high reached on June 1, 2007, as analysts reduced their forecasts for companies' earnings.

Cut on banks

ING, the largest Dutch financial-services company, favors industries whose profits are less reliant on the pace of economic growth. The strategists yesterday cut their recommendation on banks to "underweight" from "overweight," meaning investors should hold fewer shares than are represented in benchmarks.

Banks are the biggest industry in the Stoxx 600, accounting for 17 percent of the index by market value.

Insurance and retail stocks were lowered to "neutral" from "overweight," while utilities were raised to "overweight" from "underweight." Household-goods stocks were upgraded to "overweight" from "neutral," and the strategists lifted their stance on food and beverage companies to "neutral" from "underweight," the report said.

"Our downgrade may prove premature if the ECB does not raise rates or oil prices suddenly fall," the strategists wrote in the report.