Rallying equities no remedy for market gloom

The disparity between the economic outlook in Europe and the current performance of equities has not been this pronounced since just before bursting of the dot com bubble at the turn of the millennium.

Equities are experiencing an unprecedented rally this year, but market practitioners remain firmly set on a negative outlook.

This was reiterated today as Germany’s research institute Ifo published its latest country’s business climate index.

All the indicators – business climate, business expectations and assessment of business situation – fell for the fifth month in a row.

The results of the survey were more negative than expected. The indicator fell from 102.3 to 101.4 month on month, while a poll of 45 economists conducted beforehand by Reuters predicted a slight rise in sentiment.

The news caused the Euro to fall this morning by 0.6%.

The index is based on responses from around 7,000 firms in the manufacturing, construction, wholesaling and retail sectors of Germany’s economy.

Compared to last month, the majority are again less satisfied with the current business situation and expressed greater pessimism about the future.

This downward trend, however, is offset by the performance of equities over the last 12 months.

MSCI World has gained over 22% in this period, and MSCI Europe made nearly 27% since last September.

Yet Europe’s market sentiment has clearly not been boosted by the equity markets this year.

Investment appetites paint a similar picture. The majority of managers agree investors have remained in risk off mode all year and are in no hurry to re-enter the equity space.

Such a marked difference between market sentiment, using the example of Ifo expectations, and equity performance, was last spotted just before the dot com bubble burst in early 2000. Then, too, the equity markets rallied, while Ifo’s outlook remained gloomy.


But Ifo was right to be pessimistic then, as equities did experience a spectacular crash early in the new millennium. Could its prognosis, then, be correct once again?

Peter Garnry, equity strategist at Saxo Bank, thinks this may well be the case. He expects equity markets to correct themselves to match the global expectations.

He said: “It may be that economic expectations are distorted. But the divergence is so significant that something will have to give. Either expectations will rise to meet market indications, or equities will fall.”

He does not exclude the possibility of the first scenario, but considers the second a more likely outlook.

In other words, equities may be doing well now, but don’t hold your breath for the rest of the year.

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