If American investors are beginning the year burdened with a hangover from three successive years of declining market values, they should spare a thought for their European counterparts. While the Dow fell nearly 17% during 2002, none of Europe's five major stock exchanges matched even this dreary performance. German investors suffered worst of all, watching the DAX drop 44% to close at 2,892 -- nearly two-thirds off the all-time high of 8,065 it reached in early 2000. Great Britain's FTSE 100 index fell by 24% in 2002. The Italian and Spanish exchanges did little better, while France's CAC 40 lost a third of its value.
What do Europe's individual investors think is in store for equity markets in the coming year? The Index of Investor Optimism -- EU5*, a joint effort of UBS and The Gallup Organization, provides the answers.
Time to Re-Enter the Stock Market?
Data aggregated from the fourth quarter of 2002 indicate that majorities of investors in all five European nations surveyed believed it was not a good time to invest in the financial markets of their respective countries. In comparison, half of American investors (50%) polled in the fourth quarter thought the U.S. financial markets were worth re-entering, suggesting they believed the worst may already be behind them**.
Interestingly, there is considerable consistency among the views of British, French, German, Italian, and Spanish investors regarding 2003 market prospects -- even more, in fact, than characterizes the poor performances of their respective national stock exchanges in the past year. The least pessimistic investors were the French, 40% of whom said they thought it was a good time to re-enter the market (58% of French said it was not). Italians were the most conservative, though their outlook was not markedly different from that of the French. Thirty-five percent of Italians interviewed in the fourth quarter said they thought it was a good time to invest, while 62% took the opposite view.
Single-Digit Positive Returns Expected for Stocks in 2003
The average rate of return for 2003 stock investments expected by EU5 investors polled in the fourth quarter of 2002 was 6.7%. While such expectations are modest compared to the returns of the mid- and late-1990s, they still far exceed the performance of any of these markets during any of the past three years.
French investors were the most optimistic regarding expected returns on equities, anticipating a 7.5% overall rate of return over the next year. Italian investors reported the most modest expectations for 2003 (5.7%), while Spanish and German investors expected a 6.8% rate of return. British investors expected a 7.2% overall rate of return.
Despite the beating they took in 2002, investors in Europe actually had a slightly more optimistic outlook for share price growth in the coming year than American investors did. Fourth quarter data for American individual investors indicated they expected an average rate of return of 6.3% in 2003.
Despite Investors' Caution, Many View Major European Exchanges as Undervalued
The ratio of investors who said they believe their markets are overvalued to those who believed it to be undervalued may be an indicator of future activity. Within the EU5, Italian and French investors were the most likely to believe European markets are undervalued (52% and 40%, respectively). In comparison, 14% of Italian investors and 11% of French investors said they believe the markets remain overvalued.
British investors were evenly split between the relatively small proportion who viewed the market as undervalued (15%) and the similarly small number who viewed it as overvalued (15%). German investors were the least likely to view the market as overpriced (9%) -- not surprising given the steep decline in German share prices over the past two years. It is also worth noting that only 33% of German investors viewed the stock market as undervalued at its present level.
While European investors may have been more wary than Americans of re-entering the market, they were actually less likely than Americans to view current markets as overvalued. On average, investors across the EU5 were significantly more likely to see the stock market as undervalued (34%) than overvalued (12%) at current levels. (Sixteen percent of EU5 investors said shares are valued "about right"; the remainder are unsure.) In the United States, however, perceptions are almost evenly split as to whether the U.S. market is undervalued (22%) or overvalued (23%).
*Results are based on telephone interviews with a representative sample of approximately 200 investors each from the five countries of France, Germany, Great Britain, Italy, and Spain, for each month, conducted October through December 2002. Investors are those who have stocks, bonds, and/or mutual funds with a total worth of at least 10,000 euros. Data are weighted so that the overall sample of investors accurately represents the proportion of investors in each of the five countries. For results based on the total sample of 3,031 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 sample sizes of at least 600 investors is ±4%.
**Results are based on an aggregate of interviews with 15,047 U.S. investors, aged 18 and older, conducted October through December 2002. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is <1%.