In the January edition of the Expert Investor Fund Manager Sentiment Survey, all but one of all interviewed asset management companies said they think European equities will return more than 5% over the year. The one daring dissenter, who is probably happy to remain anonymous, voiced a neutral opinion.
So there we are: though we have just witnessed the sharpest equity market downturn since 2008, fund manager sentiment is now at its most bullish on record. It must be said, however, that we are not witnessing a sudden jump in sentiment. As you can see on the graph to the right, asset managers were already very positive about the prospects for European equities in December.
Back then, 16 of 19 interviewed asset managers expected European stocks to generate a return of more than 5% over the next 12 months, with the remainder being neutral. So for this bullish view to prove correct, the MSCI Europe (now down 8.3% YTD) will have to return some 14% in the remainder of the year.
Contrast with US
The difference in expectations of European equities compared to US stocks has never been so big before. Asset managers’ consensus opinion is that US stocks will generate a negative return in the next 12 months. The discrepancy is probably partly due to the valuation gap
between the two markets, and the expectations of a long-awaited earning rebound in Europe. But its main driver is likely to be central bank policy. While the Fed has embarked on a rate hiking cycle, the ECB is expected to keep policy accommodative. The gap in return expectations can not be attributed to expected currency fluctuations, as it could last year. The survey respondents do not believe the dollar will strengthen materially versus the euro in 2016.
Expert Investor’s research team visited Brussels and Lisbon in January, and they found local fund buyers also rather bullish on European equities, though to the extreme extent of the asset managers. The overwhelming majority of these fund buyers said they expect the ECB to step up its QE programme and lower interest rates further in spring, suspecting a subsequent boost to the continent’s equity markets. As a consequence, most of them plan to increase their exposure to European stocks this year.
Click here to see a full overview of the latest Fund Manager Sentiment for a range of asset classes.