European Sentiment Indicator June 2018

European Sentiment Indicator June 2018

It’s been a while since I had time to come to the blog to post my ideas. I’ve been finishing my degree and preparing for my CFA level 1 exam. However now I hope to have more free time to post and get some work done. The first thing I want to revisit is the European Sentiment Indicator, as I believe is the best indicator check the European macro “at a glance”.

This first semester of 2018 hasn’t been particularly good. We’ve seen volatility rise and markets fall. It didn’t get as bad as to start a bear market but it definitely been a challenging semester with two major drawdowns and the awakening of volatility.


Now the question we must ask ourselves is: What should we expect for the second half of the year? I tend to believe that there is a strong relationship between macroeconomic performance and stock market performance.

It is more likely that markets will go up during expansions and down during contractions or recessions. Of course, they tend to be forward-looking and vary as expectations change. In order to anticipate this, I like to check leading indicators and the best place to start in Europe is the European Sentiment Indicator. As it provides a lot of information about the European Union, Eurozone and each country in it. And it provides so in a comprehensive and easy to work with manner. So what does the indicator show?

Europe June 18.PNG
As you can see the last couple of years the indicator is not only been very strong but it has also been improving. However during 2018 this trend turned around, and it started trailing downwards. This is a sign of caution.

As this indicators deteriorate we should expect a more difficult economic environment which ultimately leads to an environment where is more difficult for most companies to make money. In addition, investors expectations start deteriorating and stock markets tend to get more volatile and face bigger drawdowns.

Sample Europe June 18.PNG

What I find especially interesting this time, is the fact that nearly every single country is facing a very similar decline in the indicator. Obviously, some are doing worse than others but the general idea is that nearly every country has turned around. Which should be taken as a huge warning sign.

Portugal June 2018.PNG

I’d also like to mention Portugal. This is no joke. The PSI 20 opened the year around 5400 and its now trading around 5550. Which means that it has managed to keep some of its gains as opposed to the DAX which is down 8% YTD or the IBEX 35 which is down 5% YTD.

I had already defended Portugal in the past and as you can see its ESI is going through a strong rebound. Which makes it so that it might be the European country in which is most interesting to hold long positions.

In conclusion, the ESI is deteriorating a peaking across nearly every European country.  Which in my opinion is not the best way to face the end of QE in Europe and the possibility of raising interest rates. Therefore, according to ESI indicator, caution and hedging seem like the best option. Keeping some exposure to the Portuguese market and reducing exposition across Europe.

Nuño Pérez del Barrio

Twitter: @nuopb


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