Last month, the men and women in silly red outfits laid their exceptionally silly red hats on the bench in Karlsruhe and spoke: Germany shall come to the eurozone bailout ball (though she shall have no more than two drinks).
Everyone from commodities traders to Chancellor Angela Merkel was delighted, it seemed – apart from a few citizens who demonstrated outside the German constitutional court, worried about the erosion of democracy and such like. World stock markets rallied, and commodities prices surged ahead.
Of course, it wasn’t just the court’s decision to support ESM [European Stability Market] that cheered markets. QE3 [a third round of quantative easing in America] and OMT [outright monetary transactions] were also headline contributors to a wave of acronym-fuelled optimism that, in the second week of September, saw “equity funds absorbing a 65-week high of $12.1 billion (€9.2 billion) and bond funds, driven by higher yielding fund groups, posting their biggest inflow since the first week of May”, according to EPFR Global.
Interestingly, retail investors bucked this trend. They were net redeemers from Europe equity funds, EPFR reported. “That was also true of US equity funds, which attracted over $10 billion in new institutional commitments but saw retail investors pull money out for the ninth straight week and 35th time in the 37 weeks YTD [year-to-date].”
It’s easy to see why professional investors might want to feel pleased about the healing acronyms emanating from monetary policy-makers. As East Capital’s chief economist, Marcus Svedberg, has noted: “Asset managers are frustrated that their fundamental analyses matter less than (the lack of) political action and sentiment.”
Indeed, they are. But if what they want is a return to a world where fundamental analysis counts for more than what people in silly red robes say, was it not illogical to be so cheered by the September actions of policy-makers?
Svedberg was writing before the wavelet of policy-related euphoria took hold, and his mission was possibly to encourage investors not to hate the equity rally of previous months. “This is not necessarily a call for investing in equities,” he wrote, “but rather an encouragement to start questioning the predominantly negative view in the market.”
But some asset managers were practically calling the end of the crisis in mid-September. “The eurozone has been battered by bad news for a long time, but at last we are seeing some good news that look like the first green shoots of recovery,” wrote Rupert Watson, head of asset allocation at Skandia Investment Group, of the decision by Germany’s constitutional court to back the ESM bailout fund.
He added: “This is just the latest of a number of bits of good news”, and went on to enumerate four developments in Europe, all but one of which related to policy matters.
I so wanted to believe him when he said: “While economic data remains very weak, this easing of tensions within the eurozone could lead to a better economic performance next year, which would have positive implications for deficit reduction plans and the global economy.”
But I didn’t. Because the euro nightmare is not over.
I remember a colleague bursting into tears in 1992 when the then UK chancellor, Norman Lamont, put UK interest rates up to 15% in a bid to keep sterling in the European exchange rate mechanism (ERM). Her parents wouldn’t be able to pay their mortgage, she said. Later the same day, sterling crashed out of the ERM. It didn’t feel good. But it did feel like it was over.
Perhaps retail investors are waiting for that “it’s over” feeling. Perhaps they are wise to do so.
As I write, the euphoria is already starting to evaporate. And in a sober commentary on the Federal Reserve’s announcement of QE3, Ted Scott, director of global strategy at F&C, compares the “unquantifiable and untested” policy with the Wright Brothers’ first flight: “They did not know whether they would fly or crash down to earth.”
You could say exactly the same about the entire euro project. With both the European and US economies wobbling dangerously in the sky, engines sputtering, it’s no wonder retail investors failed to join the excitement.
©2012 funds europe