There is a clear split in fund manager sentiment to make, which shows a very strong negative correlation with their emerging market equities outlook. When fund managers like emerging markets, they don’t expect much from Europe and vice versa. In practice, this perhaps unconscious strategy has not quite worked out in predicting stock market returns so asset managers are advised to drop it.
Methodology: in the graphs, we compare what fund managers predicted would happen to the index over the following 12 months (the bars) to the actual performance (the dots). The bars use the left-hand scale and go from -100 (all managers think the market will drop 5% or more in the following 12 months) to +100 (all managers think the market will rise 5% or more in the following 12 months). The dots use the right-hand scale to what actually happened to the market. The red line indicates a 5% market gain. If the spots match the bars then mangers predicted correctly. For the manager predictions, Skandia collects every month the house views of 15-20 global fund management groups.
In the first half of 2013, fund houses were not particularly enthusiastic about European stocks, seeing better opportunities in Japan, the US and emerging markets. Sentiment even turned negative in March, on the back of the collapse of the banking system in Cyprus. But they were proven wrong, as markets returned more than 10% each month until August on an annual basis.
In June, sentiment suddenly turned positive, and remained so until the end of the year. Returns kept following their previous path, bringing fund manager expectations in line with actual returns, with the exception of October when stock markets were hit by a mini-crash. The recent, possibly more serious market downturn experienced in December was not included in this analysis.
All in all, fund manager performance in predicting European equity returns has been mixed this year. It was better than for emerging market equities, but forecasts for other developed market equities were far more accurate. A score of six out of 12 means they have passed the test, but only just yet.
In the next and final edition, we take a look at government bonds. Did you expect 10-year Bunds trading below 0.7% a year ago?
Platinum members can view the full details of the latest EIE Manager Sentiment Survey here.