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Brave new world

Gregor Watt reports on the market turmoil from the Greek deadlock after the country’s general election but says fund managers are looking ahead of the crisis and see a glittering chance for intrepid investors

The fallout from this month’s elections in France and Greece have sent fresh shockwaves through the eurozone, with stockmarkets across the region falling sharply and the euro losing ground while US and UK gilt yields were pushed further down as investors seek safe havens.

The new French president campaigned on an anti-austerity platform but it is the Greek election result and the subsequent difficulty in forming a government that have been the major causes of instability in the market, with the possibility of a Greek default and subsequent disorderly exit from the euro a much more realistic possibility than before the election.

Three attempts to form a coalition government failed and Greece could have to go back to the polls in a bid to break the deadlock.

Ashburton macro analyst Derry Pickford says: “The Greek elections were our main concern and continue to remain so. With the New Democrats and Pasok unable to form a majority government, another election looks possible. The chance of a second Greek default and the collapse of the troika programme are rising. One possible result of this could be a Greek exit from the European monetary union. We see no immediate end to disruptive news flows from the eurozone.”

The Greek stockmarket fell by almost 10 per cent in the first two trading days after the election to 20-year lows while the yields on Greek 10-year government debt was pushed above 22 per cent. The UK, in contrast, saw 10-year gilt yields drop below 2 per cent.

Even before the election, sentiment was turning against the euro surviving the year intact.

A survey of institutional investors conducted by BNY Mellon and released last week showed that 47 per cent of the 800 institutions polled think one or more peripheral eurozone countries will leave the single currency by the end of 2012.

Henderson European focus trust manager John Bennett says he does not expect the eurozone to remain unchanged by the prolonged crisis but it depends on Germany’s willingness to moderate its current position.

Bennett says: “Ultimately, it will come down to Germany. If the periphery, which risks sucking in France, continues to undergo force-fed German medicine, then we are likely to see a revolt of some sort. We are seeing signs of this even with the breaking of the Dutch government. If Germany wants to retain the euro, Germany will have to pay. That would be likely to mean some form of eurobond. This is precisely what the market will push for in the coming months.”

When you add in the concerns about the solvency of Spanish banks after the Spanish government’s decision to take a 45 per cent stake in Bankia, one of the country’s biggest banks, to help it cope with losses due to collapse in the Spanish property market, the outlook for investment in Europe is looking volatile on a wider scale.

However, every crisis presents opportunities and Bennett suggests that brave investors may find there is opportunity in the crisis.

He says: “The short term is likely to see yet more volatility, scares, panic, plunges and rallies as the eurozone crisis deepens. Therein lies the long-term opportunity. We are struck by the premium that investors are now paying for “certainty” (bonds) while they flee from volatility (equities). The next two years are likely to offer a fabulous entry point in Europe. It will require bravery to optimise that opportunity.”

Evercore Pan-Asset chairman John Redwood says: “The euro crisis is far from resolved. This week, you can worry about the lack of a new government in Greece to meet the requirements of the bailout or about the state of the Spanish banks. If that is not enough to put you off investing, there is how the new relationship between Mr Hollande and Mrs Merkel to work out.”

In his monthly asset allocation overview, Redwood says the company is avoiding euro risk assets due to the uncertainty but it is not entirely risk-averse. With cash returns still very low, Redwood recommends a balanced exposure to other risk markets, with cash only becoming the asset to hold if the euro situation spirals out of control.

The latest outlook from Merrill Lynch Wealth Management also takes the view that the problems with the euro will continue but risk assets remain a reasonable option. Chief investment officer Bill O’Neill says the company’s preference remains corporate bonds and US and emerging market equities. However, he balances this with a favour for the dollar and gold as so-called safe havens.

Despite falls in the FTSE 100, the UK could also offer opportunities. Axa Framlington UK select opportunities fund manager Nigel Thomas says investors looking at the long term should not be put off by alarming news coming from the eurozone.

He says: “The eurozone noise should not deafen the investor to the secular trends evident throughout the world, plus the industrial renaissance of the US, to be seen over the coming years.

“Many UK companies will benefit from global growth and from some ultimate recovery of the UK economy. Our investment mantra ’things will not necessarily become better or worse but different’ is very applicable.”


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