Investors Turn on ‘Core Europe’

(July 17, 2012) — Germany and France have become “no-go” areas for an increasing number of investors as fears over the periphery countries, which have been causing most of the economic concern, have fallen.

There was a threefold increase in the number of investors who foresaw the risk of a negative shock around Germany’s economy, a monthly fund manager survey by Bank of America Merrill Lynch (BoA Merrill Lynch) showed today.

In June, just 10% of respondents predicted Germany would be hit; the number rose to 32% this month.

Some 55% of respondents feared France would also feel economic pain before the end of the year in this month’s report, an increase from June’s figure.

On this point a survey published this week by JP Morgan concurred, as market participants predicated France had the highest chance of a ‘negative surprise’ of all the major Eurozone countries – including Spain, Italy, Portugal and Greece.

Fears over these periphery countries have fallen, according to BoA Merrill Lynch’s survey, with Ireland leading the way back to the black. Around a third of investors predicted a ‘positive surprise’ for the Irish economy in 2012, up from 16% last month.

Greece is still under the weather in most investors’ eyes, however. Some 37% of respondents thought Greece would avoid exiting the euro – down from 44% last month.

More broadly, views on the global economy were similar to last month with 13% thinking there would be weakening in the coming year.

Across the board, investors felt that corporations were catching up with the sovereign gloom.

The survey report said: “BoA Merrill Lynch’s Growth Expectations Composite [Index] has fallen to 37 [out of 100] in July from 43 in June and 54 in May. A severely deteriorating outlook for profits is driving the fall in confidence. A net 38% of investors say corporate profits will worsen in the coming 12 months – compared with a net 19% a month ago. It represents a 39% point drop since May. The two-month drop is similar to the fall in confidence in summer 2011 as the sovereign debt crisis took shape.”

Despite these fears, investors’ cash piles were reduced to under 5% on average. Most expected more Quantitative Easing, but few expected it to come in the third quarter of the year.

Click here for the full survey.