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Mind over matter

Each week’s investment view is a snapshot in time. With markets more susceptible to emotion than many managers care to admit, the prevailing mood can swing just as swiftly as share prices gyrate. And often my take on the complex and ever-changing world of investment will owe much to the emotional pressures being applied at the time. Looking beyond these essentially short-term influences can be challenging.

There was more than a touch of gloom in my assessment last week of the latest twists and turns in the ongoing euro saga. Since then, the news has got worse, not better, but markets have bounced back – not spectacularly but sufficient to bring a smile to a few investors’ faces.

Was I overemotional last week? No more than usual – and I did qualify my remarks with the caveat that decisive action from European leaders would stimulate markets.

We are still lacking that firm grip the continuing uncertainty demands, yet shares rebounded against a backdrop of a likely Spanish banking collapse and consequent disastrous repercussions for the government in Madrid.

Could it be that investors feel this will eventually force the hand of the Germans? Perhaps. Equity markets might be more influenced by emotion and the need to cover short positions but the foreign exchange markets are a better indication of what long-term investors expect.

Having fallen against the dollar and sterling, the euro is staging something of a comeback. Nothing too fancy but enough to suggest that panic is receding and a break-up is looking less likely.

This is all taking place against an increasingly uncertain global picture. China has lowered rates to try to stimulate an economy that is slowing rapidly. Mind you, China’s perception of slow growth would still delight Western finance ministers.

It strikes me that the discussions taking place about how best to bolster Spain’s banks while not issuing a get-out-of-jail-free card to all of Europe’s financial institutions could be the tipping point in this whole sorry business.

Shoring up Bankia will cost more than the Spanish government can afford. The European Central Bank has already turned down a cunning plan put forward to provide a solution by sleight of hand. Real cash is needed.

We could well see a whole raft of legislation and regulation aimed at insulating governments from the effects of banking crises – and on a Europe-wide level. The aim would be to shift the costs of inappropriate and risky lending away from the taxpayer on to shareholders and counterparties.

Implementation would be difficult and is hardly assured but, if it takes place, it could prove a blueprint for how a more tightly managed eurozone might operate.

What markets are starting to believe is that inaction is fast becoming unacceptable. It always was but then that is the price you pay for operating in a democratic environment, with the electorate and established institutions limiting the power of the politicians.

Angela Merkel has found it easy to resist the issuance of eurobonds that tie in all the member states to guaranteeing their repayment because neither the wider population nor the legal framework suporting the German state would allow it to happen. Guaranteed bank bonds, within a cross-border regulatory system, might be an easier sell.

Who knows, next week markets may well be inflicted with a different set of concerns, sparking a change in the emotional responses.

This particular set of problems looks worth following closely. The future remains hidden from us but my money continues to sit on a resolution allowing the euro to stay intact. For once, markets seem to agree with me. Unfortunately, I am not sure I should take comfort from that.

Brian Tora is an associate with investment manager JM Finn & Co

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