Growth should 'top agenda' for European policymakers, say asset managers
EUROPE - Now that Italy and Greece have appointed interim governments led by so-called 'technocrats', asset managers have weighed in on what steps those new governments should now take.
For Trevor Greetham, portfolio manager at Fidelity, and Didier Saint Georges, a member of Carmignac Gestion's investment committee, the answer can be summed up in one word: growth.
Greetham said the euro-zone was "close" to understanding that it now faced a stark choice between full political union or break-up, and that Germany had finally grasped this fact.
But he was dubious that European politicians would be able to convince markets of their mettle.
"The key driver in the medium term will be the economic cycle," he said. "Further weakness will test the periphery's resolve to cut spending and increase the short-term financing required from the core.
"According to reports, the Bundesbank has again spoken out against using the ECB to buy bonds without limit. This makes a central bank enforced 'cap' in Italian yields unlikely without further market stress. The EFSF doesn't have the firepower to cap yields with credibility."
Saint Georges agreed that growth must "top the agenda".
"Any attempt to tackle the Greek problem and prevent contagion to other member states will be in vain if no substantial measures designed to stimulate short‐term growth are implemented simultaneously," he said.
"Without growth, the deficit and debt reduction will be impossible. Europe is currently opting for the Japanese method of tackling over‐indebtedness."
Willem Sels, UK head of investment strategy at HSBC Private Bank, was cautiously optimistic about the recent appointment of Mario Monti and Lucas Papademos as the new prime ministers of Italy and Greece, respectively.
"We hope markets will regain some semblance of normality as the European situation calms," he said. "Two 'technocratic' governments should go some way to help solve the structural and confidence issues that afflict the markets."
But Keith Wade, chief economist at Schroders, said the status quo was unsustainable, even if markets had welcomed the new governments warmly.
"Either we continue along the current path, where Italy is likely to run out of funding options, or Germany has to give way on [quantitative easing]," he said.
Which path did he see as the most likely?
"Thinking through these scenarios should make euro policymakers redouble their efforts to find a solution: make the EFSF fly or get external help," Wade said.
"QE is probably the lesser of two evils when compared to euro break-up, but recognising that the ship is currently headed for the rocks should spur a change of course."
David Miller, a partner at Cheviot Asset Management, said increasing weaknesses in all euro-zone bond markets would continue until Germany "got off the fence".
"Greece, Italy, Spain and France have fallen foul of bond weaknesses, and until the Germans get off the fence and ask the ECB to print euros, we can expect the trend to follow in all other euro-zone bond markets," he said.
"The IMF and Fed are waiting in the wings to help, but Germany needs to take the lead in tackling the crisis."
Ad van Tiggelen, senior investment specialist at ING Investment Management, said one of the most surprising characteristics of the crisis was the fact bond investors seemed to be discounting more "eurostress" than equity investors.
He also suggested Spanish and Italian bonds now could be good value.
"If one believes the euro-zone has a future, sovereign bonds of these countries are starting to look like an attractive investment, certainly relative to their own equity markets," he said.
"Conversely, in the northern equity markets, the relative case for equities is more compelling, assuming we will only face a mild recession."