Market structure The organization Amsterdam Exchanges is the central Dutch securities exchange for stocks, bonds, options and futures. It is divided into the stock exchange, the option and futures exchange, the agricultural futures market, clearing and data processing, and market and price information. It was created on January 1 1997 when the Amsterdam Stock Exchange merged with the European Options Exchange. The company also includes the settlement operations of these exchanges and the depositories Necigef and NIEC. The merger is expected to considerably boost its position in the international arena as it strengthens the new entity’s commercial thrust and provides numerous synergistic and efficiency benefits.
There are 651 companies and investment institutions listed on the stock market operated by Amsterdam Exchanges and its bond market lists bonds issued by 866 companies and governments, both Dutch and foreign. In terms of turnover, the stock market in Amsterdam ranks fifth in Europe and eleventh in the world while in terms of market capitalization it also ranks fifth in Europe but ninth in the world.
Amsterdam Exchanges has developed and now manages three leading indices: the Amsterdam Exchanges-index (AEX-index), the Dutch Top 5 index and the Amsterdam Midkap-index (AMX-index). Amsterdam Exchanges also jointly compiled with FTSE International the FTSE Eurotop index family whose leading indices are the FTSE Eurotop 100 index and the FTSE Eurotop 300 index.
Exchange activity in 1998 By the end of November 1998, the value of turnover of the stock and bond market of Amsterdam Exchanges was Fls2,615 billion ($1.2 billion) compared to Fls2,214 billion at the end of 1997. Total bond turnover increased from Fls1,102 billion at the end of 1997 to Fls1,110 billion at the end of November 1998 while the total turnover in shares increased from Fls1,112 billion to Fls1,499 billion over the same period.
Performance in 1998 As a result of the pessimism affecting western stock markets in 1998, caused in part by the Asian crisis, fears of a global recession have increased. In both Europe and elsewhere investors are beginning to question earnings growth projections and market valuations. These trends were evident in the Netherlands, where, towards the end of 1998, profit warnings and the consequent earnings downgrades confirmed fears of a worsening profit outlook for 1999. As a result equity prices in the Netherlands fell by over 25% in little more than a couple of months. The hardest hit were electronics (Philips, ASML), transport (KLM), construction (VWS, Heijmans) and the financial sector (ING, ABN Amro). The impact of profit warnings by ING and ABN Amro was significant and consequently the Dutch stock market has recently underperformed other markets.
However, while the risk of recession did not disappear, US economic indicators at the end of 1998 recovered and prompted hopes of a soft landing. The consensus for 1999 became less pessimistic. Analysts began to take the view that although growth will slow, the risk of full-blown recession has decreased and there was a widespread rebound in the fourth quarter of 1998. All major western stock markets have posted double-digit growth, mainly on the back of interest rate cuts first in the US and then in the euro-zone.
Even after these sharp corrections, the AEX-index closed at 1186.38 on December 29 1998, an increase of almost 30% in comparison with the closing level for 1997 (913.67). The AMX-index closed at 1420.93 on the same date, an increase of 9% compared with its closing level for 1997 (1302.67). After being undervalued in October, analysts believe that the Dutch stock market is now fairly valued.
Outlook for 1999 According to the standard analysis of the earnings/bond yield ratio, the Dutch market is currently trading close to fair value. However, most analysts believe that risks on the downside outweigh opportunities on the upside. First, the corrections experienced in 1998 – and the consequent undervaluation of the market – have been smaller and shorter lived than in previous cycles. The rebound this time has happened quickly and without taking into account the slowing earnings growth of Dutch companies. Second, consensus estimates for OECD growth look optimistic. For Dutch companies overall analysts believe that a figure for corporate earnings growth of 5% is realistic. Yet those estimates are based on OECD growth of 2% in 1999. In previous downturns OECD growth dipped to 1.5% and earnings declined three years in a row. This makes consensus estimates for this year look too optimistic. Third, much of the scope for rises in the stock market depends on current bond yields being maintained. This seems unlikely. Current levels imply deflation for the Dutch economy – a prospect few economists believe is likely and a scenario that is not consistent with either the current level of earnings or, more important, the level of future earnings implied by the stock market. So, either the bond market is correct, in which case the economy will slide into recession and profits will be hit harder than the stock market currently expects, or the stock market is right and the economy will continue to grow at between 2% and 3%, in which case bond yields will rise. In either case the outlook for stocks is at best neutral.
Bright spots Despite the somewhat gloomy economic outlook for stocks, there are technical and structural factors that should provide some comfort for investors in the Dutch stock market. On the macro-economic front, continued interest rate cuts in the euro-zone should provide short-term support for stock market valuations. The Netherlands is unlikely to benefit as much from the euro effect as other continental European markets – which expect large flows into equity markets as investors move into foreign stocks for the first time – because its equity market is already so highly developed. Also, the corporate restructuring that is forecast to transform European industry and financial services over the next decade, brought about by the introduction of the euro, will be less pronounced in the Netherlands – again because the equity culture so lacking in most of continental Europe is well established in the Netherlands.
The most significant opportunity for outperformance in is the small-cap sector. Small caps underperformed sharply in 1998. Analysts believe that this trend will be reversed this year. The large cap rebound, they believe, was a one-off event driven not by fundamentals but by portfolio rebalancing in advance of the introduction of the euro. This selling of small caps and purchasing of euroland blue chips is unlikely to continue. Also, the growth prospects of continental European economies is better than those of the rest of the world. Small-cap stocks are generally less exposed to troubled parts of the world and are focused on their domestic markets. They will benefit from strong European economic growth most. And finally, the average p/e ratio of Dutch small caps is about 11% versus 22% for large caps. This valuation divergence should close in 1999.
