Institutional Investors looking at Europe:

Merrill Lynch has released an updated survey of institutional investors and the current survey reports a very bullish sentiment by these professional investors. The survey also indicates that the bullishness is not reserved just for American markets but surprisingly there is a renewed interest in European shares.

It seems to me that the increased interest in Europe is not consistent with the deteriorating fundamentals in the region. The European Central Bank (ECB) has been focused on fighting inflation for so long they don’t see anything else. This stance has forced the ECB to increase interest rates over the past year to the point where they are now higher than US rates even as the economy in Europe has only seen small increases in GDP growth over that time frame.

The potential for continued economic growth diminishes with each interest rate hike. The impact of interest rate hikes on economic growth often takes 6-9 months to show up. The previous interest rate increases by the ECB are only just starting to have an impact on growth and the full impact is still likely months away.

The focus by the ECB on inflation and only inflation will reduce economic growth over the next year or so and slower growth will lead to lower earnings growth which will cause the equity markets in Europe to decline. Those getting in to European equities now have missed the easy money and are now taking on increased risk and reduced potential profits, not a recipe for successful investing.

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