A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

March 2, 2015

A break in the clouds over Europe?
Eurozone economic surprises, growth expectations and Composite PMI

chart

Source: Bloomberg, as of 2/27/2015. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Recent economic data suggest that the growth outlook in Europe may finally be improving, at least around the margin.
  • Economic releases this year have on balance been beating consensus expectations, including a recent gauge of the manufacturing and service sectors.
  • That said, expectations have been very low indeed—and exceeding them does not in and of itself signal burgeoning strength.
  • To be sure, European stocks are off to a solid start in 2015. The MSCI Europe Index has returned 13.24% year to date through February 24th in local currency terms (+6.09% in US$ terms), compared with just 3.07% for the S&P 500.
  • But that's only a brief period, and stock prices are up from depressed levels—so recent outperformance may or may not be sustained. Still, it does give hope that markets at least consider the prospects of better times ahead.
  • Stock prices aside, the recovery in Europe is likely to remain slow. Significant hurdles to growth still exist, not the least of which is an upswing in political populism in peripheral Europe that could potentially derail nascent efforts to implement structural reforms. As ECB President Mario Draghi stated: "without reform, there can be no recovery."¹
  • Slow yet steady progress could bode well for global growth—and for European financial markets, assuming that ongoing efforts to provide monetary stimulus, implement fiscal and labor market reforms and preserve the integrity of the euro attract the attention of now-wary investors.

The chart:

  • The chart shows the Citigroup Eurozone Economic Surprise Index, the ZEW Index of Eurozone Expectations of Economic Growth and the Markit Eurozone Composite Purchasing Managers Index (PMI) for the past two years.
  • The Citigroup Eurozone Economic Surprise Index was 50.1 in February, up from 10 in January and is at the highest level in 18 months. This index has now been positive for three consecutive months following nine straight months below zero. A level above zero suggests that economic releases have on balance been beating consensus.
  • The ZEW Index of Eurozone Expectations of Economic Growth was 52.7 in February, up from 45.2 in January and is at the highest level since June of 2014. As recently as October when the index level was 4.1, just 24.9% of respondents felt that growth would improve over the next six months and 20.8% felt it would get worse. By February, 58.5% of respondents felt that the economy would improve over the next six months compared with just 5.8% that thought it would worsen, resulting in the index level of 52.7.
  • At 53.5, the Markit Eurozone Composite PMI is at the highest level since July 2014; up from 52.6 in January. A level above 50 denotes expansion and below 50 contraction.

¹The statement was made in a speech at the Brookings Institution in Washington DC on October 9, 2014.


Definitions:

The Citigroup Eurozone Economic Surprise Index is an objective and quantitative measure of economic news defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance been beating consensus.

The ZEW Index of Eurozone Expectations of Economic Growth is derived from the ZEW Financial Market Survey. It represents the net percentage of positive and negative responses of about 350 institutional investors and analysts on the question of economic growth improving or worsening in the next six months.

The Centre for European Economic Research (ZEW) is a public-private institute associated with the University of Mannheim, Germany.

The Markit Eurozone Composite Purchasing Managers Index (PMI) is based on original survey data collected from a representative panel of around 5,000 manufacturing and services firms. National manufacturing data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece. National services data are included for Germany, France, Italy, Spain and the Republic of Ireland.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.


IMPORTANT INFORMATION:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Outperformance does not imply positive results.

This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. All investments involve risk, including possible loss of principal. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.

FN1510840

Previous Editions

Click on a date to view that week's edition of charts.

Poll

Will the current wave of central bank easing jump-start the world's economies?








Poll

Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
(30%)
No - Deflation is already taking hold, making monetary policy changes ineffective
(2%)
Yes - The US model shows that monetary easing can help economies heal in the medium term
(15%)
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact
(53%)



Previous month Poll

What would be the best news for markets for the remainder of the year?

Strong US corporate earnings validate US economic expansion
(33%)
Strength in the US dollar convinces the Fed to keep short rates low longer
(9%)
European Central Bank bond buying rekindles growth in European Union countries
(45%)
Growth in China strong enough to leave room for financial system and structural reform
(13%)