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European market volatility to continue for weeks – Blue Sky [updated]

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Institutional investors must expect market volatility for at least the next three weeks, as uncertainty remains over whether Greece will repay a €3.5bn European Central Bank (ECB) loan due on 20 July, according to Mark Burbach, CIO at €19bn asset manager Blue Sky Group.

“Currently,” he said, “investors are seeking certainly through shifting allocations and are, for example, divesting from emerging markets, as well as from Italian and Spanish government bonds, in favour of AAA euro-denominated government paper. 

“We also see volatility in the exchange rate between the euro and the US dollar, as well as in euro interest rate swaps.

“And investors are putting emerging markets under renewed pressure by, for example, taking profit by divesting Chinese equity, while others are already pulling out of the Russian market after a brief spell of renewed interest.”

However, Sander van Ginkel, macro economist for investment policy at the €110bn asset manager MN, said volatility could decrease if there is a ‘yes’ vote in the Greek referendum on Sunday on whether to remain within the euro-zone.

“The effect will also depend on how the Greek people interpret the outcome,” he added. 

In Burbach’s opinion, the risk of contagion for the financial sector is “very small”, as “all players have limited their overall exposure”. 

“But investors with illiquid stakes in Greece will be facing a serious challenge in recouping their assets if the country is adopts the drachma again,” he said. 

“And large-scale unrest is likely to have a negative impact on the entire investment market.” 

Burbach further said he was unworried about the increase in the spreads of Italian and Spanish government bonds.

“As spreads have been very low, this is a normal response,” he said. 

He made clear that Blue Sky clients have less than 0.01% exposure to Greece, and that current spreads were too narrow to justify increasing their positions. 

Van Ginkel echoed Burbach’s assessment that the risk of contagion was relatively limited.

“The ECB has now several instruments at its disposal to contain these risks,” he said.

In Burbach’s view, investors should now look for equity investments, and European stocks in particular.

“Compared with the US, European equity was relatively inexpensive already,” he said. “But since April, prices have come down at least 10%.”

However, in Van Ginkel’s opinion, it would premature to increase investments in European equities, as there are still “too many uncertainties”.

He also pointed out that equity prices were still 10% higher than at the start of this year.

Blue Sky’s CIO predicted the European economy would continue to recover “after the Greece effect has ebbed away”, and said pension funds should consider decreasing hedges of the interest risk on liabilities.

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