What can investor sentiment tell us about the current state of global investment markets?
The latest Investor Sentiment Index from Lloyds Bank Private Banking has shown investors shunning US stocks as the market tumbles on fears of a trade war.
In fact, investors remain concerned about global equities more broadly, due to trade spats between the United States and China which could develop into a full blown trade war.
Lloyds found that sentiment towards US stocks fared more poorly than sentiment towards Chinese equities, falling 12.2% in March to -2.3%. This is the biggest monthly fall in sentiment towards US equities since 2013.
US stock markets have fallen recently following proposed tariffs which were widened to include more than a thousand different Chinese products. The proposed tariffs cover goods including industrial robots, locomotives and aeroplanes.
In retaliation, China intends to impose tariffs on US soya beans, cars and chemical products.
Following news of the proposed trade tariffs, US stocks fell by 2.4% in March, putting the market in 'correction' territory. Compounding the poor sentiment from the looming trade war was the threat of more regulation for big technology companies, including Facebook and Amazon. Technology stocks experienced a global sell-off due to the threats.
However, share prices in the US at the end of March remain 11.7% higher than this time last year, with a robust economic environment combined with corporate tax cuts and easing regulation in the financial sector all positive factors for US equity valuations.
And despite the sense of an escalating trade war, investor sentiment towards emerging market equities, which include Chinese company shares, remained positive in March at +20.2%. Sentiment was highest among global equities and notably avoided the big fall sustained by sentiment on US equities.
Closer to home, investor sentiment towards UK equities has continued to fall. Lloyds Bank reported that UK shares experienced the second largest fall in sentiment, after the US. Sentiment fell by 5% to a barely positive 0.6%.
Factors hurting investor sentiment towards UK stocks included Brexit uncertainty, prompting the recent fall below 7,000 for the FTSE 100 index of leading UK company shares. It was the first time the index has fallen below this psychologically important level since 2016.
More cautious investors will be reassured to see improving sentiment towards UK government bonds, also known as gilts, which are often viewed as a safe haven during times of equity market volatility.
The Lloyds Investor Sentiment Index showed sentiment towards gilts up 2.6%, although warned this improved sentiment could be shortlived as a bear market in bonds begins to emerge, against the backdrop of rising interest rates.
Elsewhere in the world, investor sentiment towards Japanese equities declined by 2.6% in March, with this stock market falling back by 2.7% during the month.
Despite this decline, sentiment towards Japanese stocks remains positive at +11.1%. This is thanks to a robust Japanese economy and Japanese companies starting to return more of their earnings to shareholders.
For alternative investments, investor sentiment towards gold remains at its highest level among the major asset classes, at +39.1%. This was despite a modest slip in sentiment of -0.8% in March.
Gold tends to be seen as another 'safe haven' investment during times of economic uncertainty, although high price inflation risks eroding its value.
Investor sentiment for the broader commodity index fell by 1.5% in March, remaining positive at +12.4%, suggesting confidence around a possible commodity recovery this year.
Markus Stadlmann, Chief Investment Officer at Lloyds Bank Private Banking said:
The current political backdrop is unsurprisingly impacting on global equity markets. A fall in sentiment reflects investor concerns about the impact of a trade dispute between the world’s two largest economies, the United States and China.
This uncertainty has caused a repeat of the correction we saw in February and a flight to safety causing bond prices to stabilise following declines earlier in 2018. However we believe this stabilisation will only be temporary and the outlook for bonds moving forward remains bearish.
Despite this, most of the world’s economies are experiencing good growth than we have seen since the financial crisis of 2008.The recent correction has led to lower share prices, leading to some attractive opportunities for long term investors in equity markets and inflation continues to grow modestly in most developed nations; subsequently the overall sentiment remains positive.
Here at AIM we find it interesting to review investor sentiment and watch how it changes during different market conditions. We do not however believe a sentiment index should be used as a basis for making investment decisions, which should consider a whole range of important factors.
If you would like to discuss our views on the investment markets and outlook for the various investment asset classes, please do get in touch.