2015 Market Outlook EMEA: Weak Growth and QE Policies to Shape Local Market Outcomes
Investment professionals in EMEA are gloomier than their peers in the Americas and Asia Pacific over the prospects for economic growth in their local markets, according to the 2015 CFA Institute Global Market Sentiment Survey (GMSS).
In Germany — the region’s largest economy — CFA Institute members predict local growth of just 1.2% for 2015. Respondents in other European markets are similarly pessimistic, with local growth predictions of 1.0% in the Netherlands, 0.9% in Switzerland, and just 0.5% in France, the Eurozone’s second-largest economy. This wave of pessimism extends even to the United Kingdom, which was one of the fastest-growing developed economies in 2014 with GDP growth of 2.6%. By comparison, and consistent with slowing growth forecasts, investment professionals predict below-trend growth of 1.8% in the UK in 2015.
The pessimistic growth outlook marks a shift in sentiment from the start of 2014. Since the middle of last year, the EMEA region has been buffeted by geopolitical shocks ranging from conflicts in Ukraine and parts of the Middle East, the sharp fall in oil and other energy prices, the Ebola outbreak in West Africa, a collapse in the Russian rouble, and a slide into deflation in the Eurozone. These events also coincided with the US Federal Reserve’s exit from quantitative easing (QE), which had provided support to global asset prices.
In accordance with these events, respondents to the Global Market Sentiment Survey identified the potential ending of central banks’ QE and possible effects on energy prices caused by unrest in Ukraine and the Middle East as the two factors having the most negative impact on local markets in 2015.
With 2015 underway, the theme of economic unrest continues to hold sway over markets. January has been marked by a precipitous fall in the value of the Swiss Franc following the removal of its cap against the euro, and an electoral victory for the left-wing Syriza party in Greece, which came to power on the back of a campaign to renegotiate the terms of Greece’s bailout with international creditors. Against this backdrop, the European Central Bank has launched its own QE programme to battle deflation, which has provided a fillip to asset prices. One of the most closely watched issues in 2015 will be whether the ECB’s QE programme provides sufficient stimulus to ward off economic stagnation; ultimately, this initiative is likely to be the most important factor in determining whether investment professionals’ growth predictions come true.
Turning to market integrity considerations, investment professionals in EMEA continue to cite a lack of ethical culture within financial firms as the factor that most contributes to a lack of trust in the finance industry. This view is expressed by 67% of EMEA respondents, up from 61% in the 2014 Global Market Sentiment Survey.
To improve investor trust and confidence, member respondents in EMEA most frequently cited better alignment of compensation practices with investor objectives, a view shared by investment professionals in all European markets. South Africa was an exception where members identified a zero-tolerance policy by top management for ethical breaches as being marginally more important for restoring trust than better alignment of compensation practices with investor objectives.
The most serious ethical issue facing local markets in EMEA continues to be mis-selling by financial advisers, cited by 22% of EMEA respondents in 2015, but down from 30% of EMEA respondents in 2014. Although mis-selling continues to be the top ethical concern in the region, the proportion of members selecting this issue overall has declined for the third year in a row, perhaps suggesting that the spate of mis-selling scandals afflicting the region — such as mis-selling of payment protection insurance in the UK and hybrid financial instruments in Spain — may be on the wane.
To improve the state of trust and market integrity, EMEA members most frequently cite improved enforcement of existing laws and regulations and improved corporate governance practices as the two most-needed actions in 2015. Indeed, these views were shared by respondents in the majority of markets analysed globally.
At the regional level, sentiment on regulatory issues may reflect a view amongst investment professionals that following sweeping reforms to financial markets in the years since the financial crisis, enforcement and supervision of the rules that have been enacted is now most important. Following the installation of a new college of commissioners at the European Commission (the European Union’s executive body), which began its term in November 2014, it would seem an opportune moment to reflect on the legislation that has been passed and to focus attention on implementation before considering the development of new legislation.
Looking ahead, 2015 is shaping up to be a pivotal year for the EMEA region. The intersection of weak growth and central bank QE policies is likely to frame the outcomes for local markets.
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