Merrill Lynch’s fund manager survey reveals surge in negative sentiment in Germany

Fund managers that took part in July’s Bank of America Merrill Lynch fund manager survey have significantly higher expectations of the potential for negative shocks coming from Germany’s economy compared to last month. From 10%, this proportion has almost tripled to 32%.

Head of European equity strategy Gary Baker called this decline in confidence for a country that has so far been seen as a source of security within the Eurozone an “ominous” sign. “If Germany is questioned as a source of stability it’s bad news for the Eurozone,” he commented.

But the real concern for over half the survey participants is France, with 55% expecting negative surprises to come from the region this year, up from 43% that were wary of the country’s economy in June. Investors are much more concerned about France than they are about Italy and Spain, with 19% and 46% respectively identifying these peripheral regions as a potential threat.

Yet the bond market does not reflect this sentiment, Baker noted. Spreads in France have begun to compress, which would signal an improvement in investment appetite. At the same time, Spanish and Italian spreads are not demonstrating such levels of improvement.

Baker attributes the difference between the expectations regarding France on the one hand, and Spain and Italy on the other hand, to the existing low expectations of the Italian and Spanish markets. Investors that have already not been expecting much good to come from the Southern states for a long time have learned to live with the riskiness of the region, so sentiment is not falling any further, while France is posing new unexpected threats.

Yet Italy and Spain still remain of concern to investors, as do Portugal, Greece and the U.K. The only economy that fund managers are positive on is Ireland. The proportion of respondents that expects positive surprises to come from Ireland has doubled since last month, from 16% to 32%.

An overall improvement was recorded in investor confidence for the Eurozone, with the underweight in European equities trimmed from 36% in June to 26% this month, although Baker said it remains the “least loved region globally.” The tentative return to European equities has been balanced by the sharpest exit from U.S. equities over the last year, with 14% of respondents reducing their positioning.

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