After a long, dark year of grim economic news, the UBS/Gallup Index of Investor Optimism -- EU5* finds that Europeans seem to be becoming just a little bit more hopeful about investing. The EU5 Index surveys investors in Germany, Italy, France, Spain, and Great Britain with at least 10,000 euros in investable assets. The EU5 Index was established in October 2001, at +4.
The First and Second Dimensions
Between October 2001 and July 2002, the overall EU5 Index remained in the positive range, even going as high as 40 in January 2002. By August 2002, however, the overall trend had slipped below zero, and hit an all-time low (-57) in March 2003. At -46, the average for the EU5 Index from January through April this year still shows a continual decline in overall optimism since 2002. However, the last two months have seen a modest rebound; overall optimism climbed to -29 last month, and is up to -17 in May. Though -17 is still deep in the negative range, the fact that the Index surged 40 points in two months is a sign of positive momentum in the European economy.
The Index is most affected by changes to its Economic Dimension -- which gauges how investors assess the national economy and its future -- because this dimension varies considerably more than the Personal Dimension of the Index does. Over the past two months, the Economic Dimension is up a total of 27 points and currently stands at -29 (up from -39 last month). Though -29 still indicates a lack of optimism, it's a major improvement over the last several months.
The Index's Personal Dimension describes how investors see their own financial situations. Now at 12, this dimension is up 2 points from last month and a total of 13 points over the past two months.
Major Drivers
Three primary factors drove the 40-point increase in the overall Index. The least of the three factors is an increased sense of optimism among EU5 investors that they will meet their short-term investment goals. The most significant factor is increased optimism about the European stock market. EU5 investors are actually more pessimistic than optimistic about the market -- 43% to 31%, respectively. But two months ago, 62% of EU5 investors expressed pessimism and just 16% optimism.
Another factor is that EU5 investors are less pessimistic about general economic growth. Yet again, EU5 investors are more pessimistic than optimistic on this front -- 49% are pessimistic and 30% are optimistic about economic growth. But again, those numbers represent a shift from two months ago, when investors' lack of confidence in the general economy mirrored their feelings about the stock market; 62% of EU5 investors were pessimistic and 17% were optimistic.
Bottom Line
The single most important factor in the recent two-month surge in EU5 investor optimism has been increased optimism about the European stock market. The end of the war in Iraq could be the stimulus for much of this increased optimism in Europe. In February and March, about 6 in 10 EU5 investors cited the war with Iraq as the greatest threat to the global stock markets. Now that the major fighting in Iraq is over, that menace has been removed.
But other threats to financial stability continue to loom. In the May survey, EU5 investors cited terrorist attacks and instability in the Middle East as among the major threats to the stock markets. As long as European investors remain wary of global volatility, increases in optimism will be tenuous.
*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, conducted May 1-15, 2003. 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 approximately 1,000 investors, one can say with 95% confidence that the margin of sampling error is ±3%.
