While the crisis of confidence on Wall Street is having a tremendously negative impact on U.S. investors, it may end up having an even greater impact on international investors. If huge losses and imploding companies leave most U.S. investors wondering how they can preserve their capital, imagine what effect these events can have on the perceptions of foreign investors. When many U.S. investors are simply abandoning the U.S. equities markets, can we blame international investors if they do likewise? The new parity between the euro and the U.S. dollar is clearly one result of the exodus of foreign investors from U.S. markets. The incredible volatility of the financial markets during recent weeks is probably another.
In my view, the repercussions of the current crisis of confidence will be felt throughout the worldwide economy in the months ahead. Domestically, investor concerns will translate into reduced consumer spending. Businesses will be less willing to spend and less likely to hire. A double-dip recession later this year is now a lot more likely than it was a few months ago.
The repercussions will also extend beyond the United States. New Gallup/UBS Index of Investor Optimism -- EU5 data* show that investor optimism in Europe decreased in the second quarter. Fears about the U.S. economy -- i.e., the possibility that the U.S. recovery will not continue -- will make European investors less optimistic about a recovery in Europe in the near future. Worse yet, fears about the U.S. financial markets may lead many international investors to pull their money out of the United States. This would negatively impact both the U.S. dollar and U.S. interest rates.
Investor Optimism Declines in Europe
During October 2001, the Index of Investor Optimism -- EU5 baseline (conducted in France, Germany, Great Britain, Italy and Spain) was established at 4. In the first quarter of 2002, the Index increased 27 points from October 2001, reaching 31. During the second quarter, it declined to 21. In June, the EU5 Index reached 8 -- only four points above its October 2001 low.
Investor Optimism Varies Significantly Across Europe
Over the first quarter of 2002, British and Italian investors were much more optimistic than their counterparts in Spain, Germany and France. For January to March, the Index of Investor Optimism for Britain was 54, while that for Italy was 49. In the second quarter of this year, investor optimism in Britain remained virtually unchanged at 52 and much higher than investor optimism in the rest of the EU5.
In sharp contrast, investor optimism in Italy, at 49 in the first quarter, fell 26 points during the second quarter -- the largest decline among the EU5. The Index for Spain also declined, going from 16 in the first quarter to -1 in the second quarter. Similarly, investor optimism in Germany fell from 12 in the first quarter to -1 in the second quarter.
France is the only EU5 country showing an increase in investor optimism. French investor optimism was at 9 in the first quarter of 2002. It increased to 22 in the second quarter.
Interestingly, figures for the Personal Dimension of the Index are fairly close to each other in each of the five nations. German investors rate the Personal Dimension at 31, second only to investors in Britain, who rate it at 40. French investors rate the Personal Dimension of the Index at 27, Italian investors at 23, and Spanish investors at 21.
While British investors rate the Economic Dimension a net optimistic 12, and investors in Italy rate it a neutral 0, those in Germany rate it a net pessimistic -32, those in Spain a net pessimistic -22, and French investors rate it a net pessimistic -5. Obviously, the differences in optimism across Europe are largely based on differences in investor perceptions of Europe's economic future.
Only strong government actions can reassure international investors in the current climate. Those investors, even more than their American counterparts, need to see some simple steps being taken to correct the system failures that have allowed the equity of some major U.S. companies to seemingly disappear overnight. Although it looks as though that Congress will pass, and the president will sign, new legislation this summer, it seems doubtful that it will be substantive enough to restore worldwide investor confidence.
*Results are based on interviews with approximately 200 investors each in France, Germany, Great Britain, Italy and Spain per month conducted April to June 2002 -- more than 3,000 interviews were completed in these countries -- approximately 600 per country. For results based on a total sample of 3,024 investors, one can say with 95% confidence that the margin of sampling error is ±2%. The margin of error for each of the countries, with a sample size of at least 600 investors, is ± 4%.