It is helpful, now and then, to take an inventory of the conventional wisdom. Here is an outline of the latest as captured in the monthly survey of fund manager sentiment around the world, carried out by Gallup for Merrill Lynch.
Fund managers handling assets that make up a significant proportion of world market capitalisation are asked a series of questions including whether they expect an improvement in their own economies.
In early 1996 four out of five fund managers expected their own economies to improve. Since then the figure has fallen steadily at first and in recent months precipitously, with a speed not seen since the Federal Reserve raised US interest rates in the spring of 1995.
In the latest survey, carried out in early January, fewer than two out of every five fund managers expect their own economies to improve in the near future.
There is a certain amount of national variation in these figures. In the US, only 3 per cent of fund managers are bullish on the domestic economic outlook. In Japan, 60 per cent of respondents expect economic improvement but only a little. In the rest of Asia, only 14 per cent are expecting a stronger Pacific economy.
In continental Europe, 75 per cent expect an improvement in the economy, down slightly from the month before. But in Britain only 14 per cent expect the economy to strengthen, a halving of the December figure.
So that is the first element of the consensus: no strong expectation of economic growth, except in continental Europe.
The second element of consensus is more widely shared: that the Asian crisis will set to rest any fears of inflation. Across the world, fund managers are even less worried about inflation, and more optimistic about interest rates, than they were in December.
US fund managers, for example, expect 10year Treasury bonds to be yielding 5.4 per cent in a year's time (compared with the 5.7 per cent they forecast in December). Only 11 per cent of US managers expect inflation to rise, down from 18 per cent in December.
In continental Europe, where 27 per cent were expecting rising inflation in December, the drop has been even more marked only 12 per cent now expect it. Even in Britain, where fears of inflation are both more prevalent and well-grounded, the mood is optimistic. In December, 44 per cent of fund managers expected rising inflation; the figure is now 26 per cent.
So that is the consensus: a sluggish global economy, rock-bottom inflation, and falling interest rates.
Slower economic growth and low inflation will make it hard for companies to regain pricing power.
Nonetheless, equity markets have done well since those fund managers were asked for their views. The most closely-watched indicator, the Dow Jones Industrial Average, is down 9 per cent from a record set in August. But other indices are much more positive. In dollar terms, the FT/S&P Actuaries World Index is only 6 per cent below its 52-week high.
The broad US indices are in even healthier shape: both the S&P 500 and the NYSE Composite are only 2 per cent below their all-time highs, reached last December.
There is, therefore, an inherent contradiction between what fund managers are saying and doing. They say they are worried about economic growth and company profits 46 per cent of US fund managers told Gallup that the equity market is over-valued, and none said it was under-valued.
Yet the market, which reflects the sum of their individual actions, continues to reflect a high level of confidence in the future: the world price/earnings ratio, as calculated by I/B/E/S, was a healthy 18 in December. Well, there is no law which says the consensus has to be internally consistent.
