Strategists back France for top of the stocks: Equity analysts predict a dreary 1993 for British and US markets but see better prospects on the Continent. Tom Stevenson reports

AFTER a dismal showing in 1992, Continental European bourses are expected to prove the most attractive markets this year. A straw poll of the City's leading equity strategists puts the shortest odds on France to lead the pack in 12 months' time, thanks to falling interest rates.

The opposition is less than stunning, according to the strategists. Britain and the US face a dreary year, with recovery already discounted by markets. With earnings still falling, Japan will not provide investors with much excitement in 1993. The rest of Asia, 1992's best-performing region, may tail off.

Alastair Ross-Goobey at James Capel likes the look of Europe because that is where he sees the most economic pessimism. Deepening recession is always a signal to buy because it means that markets start looking forward to recovery.

Conversely, much of the good news about strong economies is already in the price. Hong Kong, Thailand and Malaysia are all expected to continue their recent growth in 1993 but the markets enjoyed sparkling runs last year and little more can be expected this time.

Mr Ross-Goobey thinks German interest rates should start to come down this year, which will take the pressure off France. If they don't, a devaluation of the franc looks a distinct possibility, giving the CAC index a shot in the arm. For the same reason, Spain, which has seen its currency devalued twice in recent months, looks set for a good performance.

David Roche at Morgan Stanley also plumps for Europe, although he thinks Germany and Switzerland, one of last year's stars, will underperform.

March, when French voters go to the polls, will be a key month, he thinks. If Germany has not eased interest rates by then, the European exchange rate mechanism is likely to crack, which will help French equities.

Both Italy and Brazil could surprise if their respective governments act effectively. But his tip for the year is the tiny Polish market. Its total capitalisation of about dollars 200m could easily double this year. That will be of only academic interest to most investors, however, as it is not the most liquid market in the world.

Sushil Wadhwani at Goldman Sachs also believes the best performers this year will be European bourses that have succeeded in detaching themselves from the ERM.

That was certainly the pattern last year, when Europe's best-performing markets were those that gave up the unequal struggle of tracking the mark, while the worst were those that kept trying.

Denmark, which was forced to jack up its interest rates to punitive levels, saw its stock market fall by a quarter last year.

From the British investor's point of view, currency fluctuations are likely to be as important as share price movements. The US market is likely to have another uninspiring year, according to Mr Wadhwani, but the rise in the value of the dollar that he expects in 1993 will make the total return of a dollar-based investment quite respectable in sterling terms.

Last year's 5 per cent improvement on Wall Street translated into a 29 per cent increase after translation into sterling.

Elsewhere, movements on the foreign exchange markets were the most significant factor in stock market returns last year. Some useful perfomances in local currency terms became spectacular, thanks to the slump in the value of sterling. Likewise the pain of a few disasters was eased by the currency dealers.

Hong Kong, despite ending the year nearly a fifth off its peak because of the refusal of the Governor, Chris Patten, to kowtow to Peking, rose more than a quarter in 1992.

Investors liked the look of an economy growing at between 5 and 6 per cent on the back of a Chinese economy expanding almost twice as fast. Because of that, corporate earnings this year could be about a fifth higher than last time.

In sterling terms, however, the improvement in the Hong Kong market was nearer 60 per cent, thanks to the link between the Hong Kong and US dollars. Thailand, Malaysia and Korea were other Far Eastern markets to have good years transformed into stunning ones from the point of view of London-based investors.

At the other end of the scale, the Nikkei index in Tokyo slipped nearly a quarter in local currency terms. The strength of the yen against the pound, however, meant that UK investors only lost about 6 per cent of their investment.

John Reynolds, an equity strategist at NatWest Markets, says the outlook for Japan remains weak, however. The Nikkei is still highly rated compared with other markets around the world, at about 40 times earnings.

Having lost about 60 per cent of its value since its peak of around 38,000 in 1989, the Japanese market looks to have bottomed out. But with earnings likely to fall by up to a fifth, shares can only be expected to mark time this year, according to Mr Reynolds.

He also likes the look of the Hong Kong market because its high growth rates are not matched by its more modest share ratings. The same applies to other Pacific Rim markets.

In the US, he thinks continued economic recovery will lead to higher interest rates, which will be bad news for equities.

Again, France is a favourite for Mr Reynolds. Interest rates are likely to fall and the outlook for inflation and the economy generally remains good.

Elsewhere in Europe, he believes that there is little hope that significant falls in German interest rates will help shares in that country. Spain, though, looks cheap on a market p/e rating in single figures.

Michael Hughes at BZW goes out on a limb with his 1993 forecast. He believes the world's top stock market is likely to be Australia. As its economy comes out of recession, earnings growth could reach 30 per cent this year, but despite that p/e ratios are historically low.

Australia also has an increasing exposure to South-east Asia, which is growing much faster than the English-speaking world where its exports used to go. As a bonus, inflation is likely to remain low.

In Europe, Mr Hughes thinks there is still value in Switzerland, despite a 16 per cent rise in the market last year. That bourse benefited in 1992 from the dollar exposure of many of its big international companies and in sterling terms the returns from Switzerland looked very healthy. Always considered a safe haven, it should still get a boost from its knowledge-intensive industries.

On a more speculative basis, BZW thinks the Philippines could be a good performer this year. Having endured a series of disaster, including an earthquake, share ratings are low and the house recently upgraded its weighting.

(Map omitted)