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Friday market view: Draghi is finally writing an end to euro crisis

Christine Johnson MM blog

When Mario Draghi made his bold claim to ‘do whatever it takes’, we listened with the jaded scepticism of the battle-weary. The Spanish and Italian bond markets seemed to like what he said, but the rest of us had seen this movie before and we knew it had a bad end.

But, I’ve been a fan of Mario Draghi since he took the worst, or possibly best job on the planet. He is a doer and a pragmatist. His Long Term Refinancing Operation was a decisive act that averted a major catastrophe. It signalled a man who ‘got it’. Second, unlike his political counterparts, Draghi has the keys to the safe. Should he chose to unlock it, the firepower of the European Central Bank is immense.

Draghi’s latest plan includes buying eurozone government bonds in unlimited amounts. The implications are profound. It is a declaration of independence. Draghi has stared down the Bundesbank, ending an era in which the Germans had only to ‘raise an eyebrow’ and the ECB fell into line.

In buying member state bonds, the ECB will transfer risk from that state to the entire monetary union. It creates a fiscal union in all but name, effectively bypassing any explicit authority from the representatives of ‘core European’ voters.

The economic landscape remains pitted with problems, but a major tail risk has been removed. We’re back in the land of the known.

As investors, we can act with more confidence, increasing risk at the margin.

One stock we like – going right to the heart of the eurozone beast – is Santander, the Spanish bank which currently has a higher credit rating than its own government.

It provides exposure to any eurozone bounce back, but with lots of cushioning. Most of its business is in high-growth economies in Latin America but it qualifies for ECB support.

Better prospects in Europe will lift the global economic outlook, opening opportunities more broadly.

BHP Billiton, the mining business, is a good place to start. It’s a big company, with £25bn net income last year, so reasonably low risk, with a credit rating to match.

Despite its size, it remains uncomplicated. It has excellent iron ore assets, making it a clear play on growth in emerging markets, but it has been carefully building out interests in more consumer-oriented commodities, particularly oil and copper.

Another company leveraged on economic growth, though in a very different way to BHP Billiton, is the US carmaker Chrysler.

This is a business that has seen a tremendous recovery since the dark days of 2009, when it benefited from a government rescue. Chrysler is a lower rated company – single-B – but in our view companies in this position currently offer tempting prospects. The lower rating means it needs to pay more to investors but its good financial position seems to make the risk worthwhile.

Let us not get too excited too soon. These companies and the sectors they represent had a tough first half as growth forecasts came down and the macro picture is not going to improve drastically, not any time soon. But the dust is starting to settle.

Central banks are working round the clock to avoid sliding back into a harsh recession and Mario Draghi has at last re-written the end of the dreadful B-grade movie that the eurozone was turning into.

Christine Johnson is manager of the Old Mutual Corporate Bond Fund


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