We are nearing the end of the prediction season, perhaps thankfully, but as the detective Columbo used to say on the NBC Mystery Movie -- "One last thing . . ." In this case, as we gaze forward into the 2012 equity market, let us gauge investor sentiment by perusing results from the CFA Institute Global Market Sentiment Survey. The survey was taken in early November, and compiled over the following few weeks. The survey takes the pulse of more than 2,700 professional money managers and analysts, so it's a good tell on how institutional investors are feeling as they head into 2012. What do they think of the coming year?
On the economy, it's no surprise that most members are more positive on their own region than they are on the global economy -- except the Europeans, naturally. One interesting data point is that more Asians felt that the global economy will contract this year, as compared with Americans or Europeans. Perhaps this indicates fear that China will drag down the world?
Sentiment was universally negative on European debt, with a majority of all regions expecting the sovereign debt crisis to worsen in 2012. Less than 20% expect improvement. The contrarians will claim that means the bad news is "priced in." Beware, though, because expectations of deterioration does not give you a sense of magnitude -- only of direction.
Also unsurprising was that the biggest risks to capital markets were perceived to be "systemic disruptions." Rounding out the leanings were "weak economic conditions" and "political instability." All three could fairly be said to describe Europe, indicating again that Europe is on everyone's mind.
Despite a dour economic outlook, equities received the highest expected return in 2012 across all groups surveyed, but an equal number of Asians believe precious metals will provide the highest return, thus indicating strong underlying demand for gold in the coming year. For companies with high cash balances, the Americans believe they should start paying out dividends, while others (especially Europeans) believe retaining it for safety is the better option.
Overall, the survey would imply that a lot of bad news out of Europe can be absorbed by the markets since the outlook is already so poor, and that investors really want equities to have a good year. If earnings cooperate, the markets could be setting up for a better year than what we saw in 2011.