August was not all bad: 79.5% of respondents to the Off The Record survey stated that core government bonds had performed well; gold/precious metals (24% of respondents), currency exposures (20.5%) and global macro funds or other hedge funds (17%) also turned up trumps. But of course, that tells its own story: August was all about fear, extremes - and the euro.
An Austrian fund said: “We have increased our exposure to high-quality government bonds and added a US dollar position in our bond fund, which helps us hedge the risks associated with the euro crisis.”
A total of 53% doubt that the euro will exist in its present form by October 2016 - and only about a third of those think the changes will be “minor and manageable”. Some 29.5% of respondents believe the euro would exist for at least five years in its present form, while the remaining 17.5% were unsure.
A Dutch fund that was positive about the euro’s future commented: “[The] euro is, despite all the comments, still a success for companies and consumers.” However, a UK fund insisted there was “not a cat in-hell’s-chance” of it persisting in its present form. “And the market already knows it.”
Of those that believed the euro-zone would break up, 76% thought the ‘core’ countries such as Germany, Finland, the Netherlands and France would remain in the ‘new euro’. “Core countries will not give up [the] euro [as they] do better with a common currency,” commented a Liechtenstein fund. Nobody expects a ‘new euro-zone’ containing just ‘peripheral’ countries.
Just under 10% felt there would not be a ‘new euro’ at all, but that each country would revert to its own currency. A UK fund said: “The break-up will be so fractious that there will be no alternative but to revert - the idea for the euro was totally misconstrued.” The remaining 14.5% of respondents felt some other scenario was likely.
Nine out of 10 respondents admitted that their organisation did not have any kind of euro-zone break-up emergency procedure in place, although 15.5% are working on one. “There is nothing to date to indicate that there is a serious possibility of [the break-up] happening. If there was, then advice would be short in finding the best way of mitigating any possible effect,” commented a UK fund.
Nonetheless, several respondents said their fund was taking or considering some action in response to uncertainty about the euro. An Austrian fund stated: “We are lowering our exposure to European government bonds. This process has been accelerated as a result of the euro crisis.”
An Italian scheme planned to “decrease the risk exposure (equity markets and euro peripherals), shorten duration, [and] increase investments in emerging markets debt”.
Some 37.5% of respondents felt it was time to buy core government bonds, rather than be tempted by the wide spreads on peripheral bonds, for fear that peripheral countries will have to default. “Security is more important than return during this period,” said a French fund.
Almost as many (34.5%) thought it was time to sell all euro-zone bonds and look elsewhere for government exposure. A Portuguese fund commented: “Buying time for the euro will need additional finance from all euro-zone members.”
With yields so low on core bonds and the core countries set to pay to bail-out the peripheral countries and save the euro, 28% stated that it might be time to buy periphery bonds. “Italy and Spain are starting to look interesting. Germany is overvalued and we expect a solution to be found, so spreads over Germany should narrow meaningfully,” stated an Austrian fund.
Respondents blamed the current trouble in the euro-zone on various sources. Several pointed their finger at politicians. “Politicians have behaved very irresponsibly for a long time and are only considering their popularity, not the future of their country, companies, citizens and taxpayers,” said a Finnish fund.
A Bulgarian fund added: “Politicians from the periphery countries are to blame for the low discipline. Politicians from the core countries for the low control and bad rule implementation.”
Respondents also blamed what they felt was a flawed concept for the euro from the outset. A Danish fund stated: “The original designers of the euro were not well prepared, and hence not equipped to deal with stress.”
However, a Swiss fund felt it was not possible to place the blame on one group, saying: “The whole system is to blame. It is the reason why the whole system has to find concerted solutions, not overly penalise investors, the banks or the peripheral states. Losses have to be shared.”