Putin Delivers Body Blow To European Investor Psychology

On a day when US market participants were apparently feeling decidedly less enthusiastic about the outlook than they were just a few days ago (there’s some sarcasm in there — last week, stocks were caught up in an epic multi-session squeeze, which some mistook for fundamental bullishness and/or discretionary investors playing offense), I thought I’d highlight a few findings from the European edition of BofA’s monthly Global Fund Manager survey.

Note the emphasis on “European.” The regional poll doesn’t get much coverage in the financial media. In fact, it was just three months ago when, during a brief exchange with a reporter at a mainstream financial news outlet, I joked that I felt bad for the analysts who compile the poll because it’s perpetually overshadowed by Michael Hartnett and his flagship global survey.

Well, the joke’s on me in March, because thanks to Vladimir Putin’s decision to invade his neighbor, what the European money thinks is now more important than it’s been perhaps since the sovereign debt crisis.

One thing to like about the European survey is that the answers to the questions often admit of a bit more nuance. Consider, for example, the figure (below) which shows responses to a question about supply chain disruptions.

There’s quite a bit more informational value there than some of the broad-based questions included in the global poll.

The main takeaway is that the decrease in the percentage of respondents who said supply chain problems were weighing on growth and would only ease slowly (a dour outlook on its own) was mostly attributable to a surge in those who expect things to get worse. That, in turn, is attributable to the war. Following the invasion, no one was willing to say supply chain problems would ease rapidly and drive a growth rebound.

Also notable was the nuanced set of response choices related to a question about the prospect of “one last reopening boost” once the Omicron wave recedes — if it ever recedes.

The chart header speaks for itself but, again, the breakdown is mildly interesting. About 40% each think i) any additional reopening impulse in Europe will be short-lived, providing “marginal,” if any, support for stocks, or ii) to the extent there is another reopening impulse at some point, a hawkish ECB will overshadow it. On Monday, money markets were pricing two quarter-point hikes from Christine Lagarde by December.

BofA’s Andreas Bruckner and Sebastian Raedler described the collapse in European growth expectations as “historic.” “European investors have slashed their growth outlook for Europe in response to the Russia / Ukraine conflict [with] a net 69% of respondents expect[ing] the European economy to weaken over the coming year.” That was the highest share since the eurozone debt crisis.

Before you write that off as a dry, meaningless survey statistic, note that in February, a net 12% still expected better growth in Europe. So, the MoM swing was an astounding 81 percentage points! BofA’s data on that question goes back to 1994.

Almost as remarkable was the surge in the share of respondents who think equities have peaked for the current cycle. Nearly two in three said the top was in, compared to just one in five the prior month (figure below).

Almost half said the main risk to their portfolio was “not having enough defensive hedges.”

Speaking of defensive hedges, cash levels among panelists leaped more than one full percentage point to 5.6%. That was the highest in two decades, and nearly the highest level in history.

Note that virtually all of March’s pessimism (relative to February) came courtesy of Vladimir Putin.

On Sunday, the UN said the invasion has now forced 10 million people from their homes in Ukraine. That’s almost a quarter of the population. More than six million of those displaced individuals are still in Ukraine, seeking shelter wherever they can find it.