Cautiously optimistic

The FTSE 100 continues to cling to the 6800 level ahead of Thursday's referendum vote. Should the vote be as we fully anticipate a “no”, then one would expect a relief rally at least after the result is released. If it is true that investors have been using this uncertainty as yet another opportunity to sell, demand for UK equities could take the FTSE 100 through its previous record highs. Tuesday's inflation data reporting that inflation remains below the Bank of England's target of 2% continues to add support for the equity market.

Later on Wednesday we get to find out how the members of the Bank of England's monetary policy committee voted at the last interest rate meeting, while in the US later on we get the Federal Reserve's latest take on interest rate policy. On Tuesday there were reports from two surveys that suggested businesses and analysts remaining cautious on the outlook for the global economy, despite the continued corporate activity.
The German ZEW survey takes the views of 350 analysts on the economic outlook, then takes those views to produce a figure based on the number of analysts that are optimistic against those who are pessimistic of the outlook in the coming 6 months. We find the latest survey result extremely encouraging as it reports pessimistic sentiment continuing to rise. As one can see from the chart below, going back over the past 2 years, the low points coincided with a stock market rally and the high points with a stock market correction. Our view of the results of this survey is to remind us of Warren Buffett’s famous saying, "As others get fearful we get greedy”.

The other survey that caught our eye was a report from the business round table survey. This survey reports the views of CEO's outlook for the economy. The report, like the ZEW survey, shows caution amongst the respondents for the outlook. The report states corporate executives are cutting back on plans for sales, hiring and capital spending. On the face of it that report would suggest caution, but here are the first few lines from the Q1 2007 survey: Business Roundtable's first quarter 2007 CEO Economic Outlook Survey shows that leaders of America's top companies continue to see the U.S. economy in a stable growth position moving forward, with conditions generally favorable for business expansion. So just as we were about to hit some of the most turbulent times in history CEOs were sitting back feeling confident.

CEOs are human, and as we know they feel the most optimistic at a time when the wise remain most cautious. Our conclusion to both of these surveys is whilst fear and caution remain the watch word, we remain hopeful and optimistic.

ZEW Indicator of Economic Sentiment (Germany) vs German Dax Equity Index (2 year)

Posted on September 17, 2014 .