As the sudden drop in commodity prices, increasing deflationary pressures in Europe and slowing growth in China are casting their shadows over the world economy, most European fund selectors have become cautious. While the share of fund selectors expecting a further economic rebound plummeted from 59% to 41%, the number of fund buyers seeing the current slow growth scenario continuing increased from 38% to 51%.
In September, we counted a majority of optimists in nine out of 13 countries. Now, optimists remain dominant only in the Netherlands, Spain and Portugal. The sentiment change was most prominent in Belgium, which changed from being the most upbeat country to one of the most pessimistic. Italy harbours most ‘neutrals’ though, more than three quarters of respondents.
MSCI World correlation?
When assessing their outlook, fund selectors seem inclined to assess future equity market performance rather than economic growth. At least, their extent of optimism is much more correlated with the performance of the MSCI World than with actual global economic growth, which has stayed more or less constant around 3% over the past three years. In the graph above, net macroeconomic sentiment (optimists minus pessimists) is compared with the return of the MSCI World in the 12 months after investors were polled.
It’s obvious, perhaps with the exception of the second half of 2013, that fund selector sentiment has improved in line with better returns on the world’s equity markets, culminating in 2014, when both macroeconomic sentiment and MSCI World returns hit a 4-year high. As fund selectors have downgraded their macroeconomic outlook, we might well expect stock market returns to head lower too this year…