Just a little over a month ago, the majority of asset management companies questioned for the EIE Manager Sentiment Survey still thought US equities would return at least 5% in local currency terms in the next 12 months. In February, sentiment suddenly dropped into neutral territory (below 25 points), meaning the consensus view is now that they will return between -5% and +5%. US small cap sentiment even fell turned negative, for the first time since December 2011.
By contrast, European equity sentiment soared to 80, the highest score ever recorded. The previous high was 78 points, recorded in August 2007. Indeed, that was just before news about dodgy mortgage-backed securities from the US started to unsettle equity markets… Also when it comes to European equities, asset manager are catching up with a trend set by fund selectors, who have been buoyant about the asset class for a couple of months.
Of course, they are all triggered by the same thing, Q€, which they expect to benefit equity markets. Interestingly, European equity fund manager sentiment has now surpassed its equivalent for Japanese equities for the first time since autumn 2012. The latter figure has been suspiciously high ever since QE was launched in Japan a couple of years ago, partly because as a side effect it led to a depreciation of the currency. While the Nikkei 225 index has more than doubled in value in yen terms since 2012, gains for foreign investors have been much smaller.
Is history repeating itself? Well, for dollar-based investors this is certainly the case. As the graph above shows, American investors in the EUR Stoxx 50 index would have lost money during the past year if they hadn’t hedged their currency exposure, while euro-based investors would have made a profit of almost 20%.
Still, European fund selector sentiment could very well stay at its current high for a while. Though the euro has been following pretty much the same devaluation path as the yen did in 2013, it is indeed the base currency of most European investors.