March 29, 2024

Off the Charts: Investors in Europe See a Glass Half Full and Rising

Or at least investors seem to believe they are.

A survey of investor sentiment in the euro zone this month moved into positive territory for the first time since the summer of 2011. European stocks have been rising for more than a year, with bank stocks leading the way. The yields on Spanish and Italian government bonds — which were more than five percentage points higher than German bonds’ last summer — now have spreads half that level.

It was last summer that the European Central Bank took steps to get needed cash into the hands of banks, ending the immediate fears of a collapse of the euro zone. But much remains to be done.

The German elections next weekend have delayed a lot of decisions. The widespread assumption is that Angela Merkel will remain chancellor, but it is not clear if the current coalition with the Liberal Democrats will be able to survive. If not, she may have to turn to the opposition Social Democrats and try to form a grand coalition.

There is also wide speculation about the health of European banks. In the summer of 2012, the European Central Bank took steps to provide low-cost loans to banks to buy bonds issued by their own governments, and some did, particularly in Italy and Spain.

When there are new stress tests next year — conducted for the first time in the same way in all countries across the euro zone — some analysts fear that banks may be forced to hold more capital if they have such bonds. Conceivably, such a requirement may lead the banks to sell such bonds, driving prices down and yields up and damaging the confidence that has been growing.

But none of that has so far held back investor enthusiasm. An index of European bank stocks, shown in the accompanying chart, is up by almost half since the end of 2011, although it remains more than 60 percent below its 2007 peak.

The Sentix measure of investor confidence in the euro countries climbed into positive territory this month for the first time since 2011, and it did so largely because of optimism for the future. The measure is based on questions asked of investors, and it now finds institutional investors more confident than retail investors.

Sentiment regarding current conditions has risen, but it is still negative, according to the survey. But when investors were asked about conditions six months from now, the level of optimism has risen to the highest level since the spring of 2006, well before the recession.

It may be noted that all this enthusiasm has come despite continuing declines in gross domestic product in many countries in the zone, and despite high levels of unemployment. To some extent, it no doubt both reflects the improvements in the stock and bond markets and is a cause of them.

Does all this show foolish complacency? Or does it reflect an awareness that the worst is over for the peripheral countries in the euro zone, with recovery on the horizon? By next summer, we may have the answer.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/09/14/business/economy/investors-in-europe-see-a-glass-half-full-and-rising.html?partner=rss&emc=rss