The G-7 finance ministers met in Washington, D.C., last weekend
to prepare for the International Monetary Fund (IMF) and World Bank
meetings. Among their worries are: the world's plunging stock
markets, the debt crisis in Latin America, the inability of the
world's second-largest economy -- Japan -- to grow, the potential
for renewed recession on a global scale and the probable war with
Iraq. New investor sentiment data suggest that if they haven't
already, the world's finance ministers should add plummeting
investor confidence in Europe to their list of concerns.
EU5 Investors Turn Pessimistic
European investor sentiment turned decidedly pessimistic in
September, according to the Index of Investor Optimism -- EU5, a
joint effort of UBS and The Gallup Organization to measure investor
sentiment in five key European nations*. The EU5 Index is now at
-24 -- down 23 points from its essentially neutral stance in August
(-1). The September reading is the EU5 Index's most negative
measurement since its baseline was established at +4 in October
2001.
Overall, the EU5 Index turned substantially negative (net
pessimistic), but although the Personal Dimension of the Index also
decreased, it remained positive at +9. The Personal Dimension hit
its 10-month high of +44 last January. By August, it had declined
to +18 before falling another nine points in September. Not great
news, but at least EU5 investor perceptions along the Personal
Dimension remain in net optimistic territory.
The Economic Dimension of the EU5 Index is the reason EU5
investors are currently net pessimistic. The Economic Dimension
plunged 14 points this month -- going from -19 in August to -33 in
September. European investor sentiment toward the economy is now
more negative than it was about a year ago, when investors rated
this dimension a -29. EU5 investors have become very negative about
the prospects for the European economy in the months ahead.
Older EU5 Investors Are More Pessimistic
European investors of both genders are about equally as
pessimistic. The overall September EU5 Index figures were -22 for
male investors and -25 for female investors.
On the other hand, younger European investors are much less
pessimistic than their older counterparts. The September overall
EU5 Index for investors 40 years and older was -34. In sharp
contrast, the EU5 Index for investors under age 40 was +1, meaning
that younger EU5 investors remain virtually neutral -- neither net
optimistic nor net pessimistic.
Key Points
Investor confidence is in pretty bad shape around the world as
we enter the fourth quarter of 2002. In the United States, investor
optimism has stabilized at very low levels during the past couple
of months, as many investors continue to worry about the validity
of today's corporate accounting and reporting (see "Is the Fed
Listening to Investors?" in Related Items). At the same time,
European investor sentiment has become decidedly pessimistic. New
data show that the potential for war with Iraq has added
significantly to EU5 investors' concerns about the future of the
European economy (see "Tensions With Iraq Alarm European Investors"
in Related Items).
This is an extremely dangerous situation for the worldwide
economy. Four out of 10 investors in Europe say that the stock
market's weak performance over the past couple of years has
permanently changed the amount of money they will invest in
equities. And nearly nine out of 10 of these investors (86%) say
this means they will reduce their stock market investments. With so
many investors pulling their money out of the world's equity
markets, it is hard to see how any country can build economic
momentum. Corporate executives are not likely to make major new
capital investments to grow their businesses. New entrepreneurs are
not going to be able get venture capital funding, and the corporate
credit crunch is likely to get worse.
The world's finance ministers are currently focusing on some
important issues. Setting up a way for countries facing a debt
crisis to enter a negotiated bankruptcy process is essential.
Anticipating the potential worldwide economic impacts of a war with
Iraq is another vital issue. Still, it would be a big mistake for
the world's economic policy-makers to ignore the current crisis of
confidence in the investor community. Unfortunately, at least for
the immediate future, that appears to be their plan.
*Results for the Index of Investor Optimism -- EU5 are based on
interviews with approximately 200 investors each in France,
Germany, Great Britain, Italy, and Spain conducted Sept. 1-15,
2002. For results based on a total sample of approximately 1,000
investors, one can say with 95% confidence that the margin of
sampling error is ±3%. In addition to sampling error,
question wording and practical difficulties in conducting surveys
can introduce error or bias into the findings of public opinion
polls.
