CONTAGION IN EUROZONE IS AN OPPORTUNITY
James Abate, PSigma AM
In the investment world, the impact from Greece’s fiscal crisis on the euro (and related concerns about sterling) has led to a stronger US dollar boosting returns for non-dollar based investors in US funds.
In spite of this, UK investors’ global portfolios are still significantly underweight the US, relative to the country’s economic size and market capitalisation.
But this will change as the dynamism and leadership of the US leads investors to reverse underweight positions. The Greek fiscal crisis is a transformational moment about sovereign risk perception and it has broken the correlation between strong US equities and a weaker dollar for UK investors in US funds.
The situation in Greece will deteriorate further and will spread.
Andrew Cole, Baring AM
The contagion exists to the extent that politicians across the periphery of Europe have felt obliged to tighten policy more than they would have done.
A weaker euro will create a virtuous cycle for exporters but markets are worried about domestic growth. So for the moment investment managers are voting with their feet by avoiding European assets and selling euros. Investors should be worried about the long-term inflationary consequences of the bail-out. You can sell equities and buy up risk-free assets but you have to believe you are nimble enough to jump out if and when the experiment goes wrong. I doubt we are heading back to October 2008 levels – we know how politicians are going to respond. There are fewer unknowns, but that doesn’t necessarily mean we like the answers.
Dave Dudding, Threadneedle AM
In the short term, markets are feeling the impact of concerns about Greek default, Spanish bank solvency and the possible demise of the euro. The end game for Spanish banks probably involves further consolidation and market share gains for the bigger players to up their exposure to fast-growing Latin American markets.
Good quality companies with dominant market positions, very strong balance sheets and exposure to international growth are being sold off indiscriminately. Many of these firms are trading on single-digit price-earnings ratios, despite a high degree of confidence in the earnings outlook and dividend yields that in some cases are higher than the corresponding corporate bond yield. These valuations are a function of short-term fear rather than fundamentals. This is a great long-term opportunity.
Darren Williams, AllianceBernstein
As the crisis on the euro-area periphery spills over onto global markets, there is growing concern about the negative ramifications for economic growth. Although some policymakers have characterised this as the biggest crisis to threaten Europe in over half a century, I would caution against extreme pessimism.
We are back in uncertain territory. Strong global growth, an expansionary monetary stance and a falling euro would normally point to solid Eurozone growth.
The ECB’s willingness to provide unlimited liquidity has been even more important as it will give the region’s banks critical support. But the deterioration in credit markets represents an important challenge to a fragile recovery. And the longer financial stress lasts, the bigger the risk that it will overwhelm positive fundamentals.