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European pension funds shrug off risk of asset bubble

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The risk of an asset bubble bursting and stalling European economic recovery has been shrugged off by pension funds, despite concerns remaining about the impact of quantitative easing (QE) and the lack of structural reforms.

Asked in IPE’s latest Focus Group if the European recovery would be sustainable over the medium-term, 20% of pension funds said they were either certain of very confident, while a further half of respondents said they were quite confident.

None of the 21 respondents, representing funds with nearly €275bn in assets, felt the recovery was unsustainable, but one did say it remained concerned about the foundation of growth in future.

The funds also rejected the idea that a European asset price bubble could derail growth, despite the search for yield driving up prices in markets including real estate and infrastructure.

Only 28% said they believed an asset bubble would burst, whereas the remainder of respondents argued it would not occur.

According to one Dutch fund, the risk of a bubble was elsewhere. “Such a bubble is more likely in the US, but not in Europe.”

However, concerns over Europe remained. One fund representative said growth faced too much uncertainty and cited lack of reform in “key” countries such as France, as well as Greece, as reason for worry.

A Spanish fund raised several more potential hurdles facing growth, such as the proceeds of QE not flowing into the real economy and the stimulus programme being launched by the European Central Bank at a time when rates were already low.

“Much needed structural reforms have hardly been made in Europe, and now with QE and lower oil prices there is even less pressure to enact them,” the Spanish respondent added.

Despite the concerns over lack of reform and the impact of stimulus, two-thirds of respondents said that increased business investment would drive growth over the next 18 months. 

A similar percentage of respondents felt that monetary stimulus would also drive growth over the same period, while half of pension funds surveyed were neutral on whether growth would be driven by increased labour productivity. 

Read more results from the Focus Group in the current issue of IPE

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