By Ron Rimkus, CFA
Good investments arise when one identifies a disconnect between the expectations of the market and the underlying reality. Yet, getting two investors to agree on specific opportunities or risks is sometimes a Herculean feat.
Individually, investors employ a wide range of styles and investment principles to govern their investment decision making. Collectively, these various investors and their principles form beliefs that drive market behavior. Successful investors typically form a clear understanding of these market expectations that get embedded into a particular security at a specific moment in time and then compare those market expectations to their own. So, whatever your particular investment style or belief system, the CFA Institute Global Market Sentiment Survey (GMSS) can help you better understand what the market believes and thereby help you make better choices for your portfolios as you apply your own investment style.
The GMSS surveys investment professionals to identify their expectations about the markets in the coming year. This year, the survey found that investor attitudes about the global economy are shifting in a positive direction. In absolute terms, it’s still mildly negative mind you, but the second derivative is positive — and it’s a meaningful change.
Such a shift in attitudes about fundamentals is typically bullish for equities. In this year’s survey, 40% of respondents said they expected the global economy to expand next year (i.e., in 2013), which is up from just 34% a year ago. On the flip side, only 20% said the economy will contract next year, versus 29% who were expecting contraction a year ago.
In one of the more remarkable contrasts of the survey, 62% of investors in Germany expect their economy to expand in 2013, while only 21% of respondents in China feel that way. Could it be that Germany is experiencing a strong real estate boom (and hence stronger growth) due to the ECB’s zero interest-rate policy? Likewise, China is experiencing a recession due to a struggling banking and real estate sectors.
Respondents were also asked about their views on expected asset class performance. Fifty percent of those surveyed expect equities to outperform all asset classes in 2013 — up from only 41% a year ago. Coming in second were precious metals at 22% (down from 25% a year ago) and commodities at 16% (up from 15% a year ago).
As far as specific equity markets, respondents were most enthusiastic about the United States, which was ranked first by 32% of respondents. Then China placed second, receiving 17% of the votes, and Brazil placed third, receiving 10%. So, in combination, respondents expect the fundamentals of the global economy to improve, equities to perform well in general, and US equities to perform well in particular.
When it comes to the European sovereign debt crisis, those investors closest to the eye of the storm are the most optimistic about its resolution. Respondents in Spain, Italy, Germany, and France led the way with 53%, 46%, 43%, and 43%, respectively, indicating that they expect the crisis to ease in 2013. Whereas, respondents in the emerging markets were much less optimistic. Only 12% of respondents in Russia, 15% in the United Arab Emirates, 16% in India, and 18% in Brazil felt that the European sovereign debt crisis would ease in 2013, revealing a wide gap between local investors and foreign investors, and in particular emerging market investors. So, is this a home market bias at work or is this merely the manifestation of local intelligence that has yet to disseminate across the globe? Either way, the European sovereign debt crisis remains the top issue on the minds of investors across the globe.
So, this survey reflects what professional investors all over the world believe about the markets today — including the money they have used to back up their opinions. And while there could be a discrepancy between the marginal dollar invested and the marginal opinion, it is likely that the two coincide quite nicely. So, whatever your belief system about the markets, the data is here and perhaps you can identify a disconnect between your beliefs and those of professional investors. As always, the choice is yours. Happy hunting!