Europe still on the brink, warn allocators

Fund managers are already encouraging ‘risk-on’ attitudes after markets plunged in August, but allocators argue ‘not so fast’.

“For a few days, it did feel like we were looking into the abyss of 2008 all over again.” Many European fund investors might have echoed this sentiment, from a
German peer, early in August. Markets melted, economies wobbled and safe assets soared.

Global shares headed towards a 20% slump since their cyclical peak in May, gold showed few signs of slowing after breaching $1,900 per ounce in mid-August, and safe harbours of Switzerland’s franc and Japan’s yen jumped so sharply their national authorities repeatedly intervened.

The yield on Treasuries – ‘the least ugly asset to own’, said one allocator – fell below 2% for the first time since 1950, even though Standard & Poor’s cut America’s creditworthiness from top notch for the first time. By mid-August many risk assets were trading at their lowest valuations for a generation.

Rupert Hengster, managing director of Edmond de Rothschild Asset Management (Deutschland), says: “The investment areas that do not carry risks for investors are getting smaller and smaller in the current environment. Gold is ‘safe’, for example, but not very liquid and there are disadvantages.”

“People realise there are no ‘safe’ assets, only cash – as long as you have it spread out. I am holding 20% cash in our total return fund,” said David Coombs, head of
multi-asset investments at London’s Rathbone Unit Trust Management.

And Steve O’Hanlon, head of fixed income at asset and wealth manager ACPI, says: “The problems today are monumentally more dangerous than they were in 2008 –
now we are talking about whole countries. Nearly every major economy is either fighting inflation or bankruptcy, and monetary stimulus, when it does come, only makes the situation worse, just look at the record of QE2.”

Risk on or risk off?

Despite such warnings, parts of the investment community have stopped ‘looking down’, and instead look ‘ahead’.

Some managers encourage allocators to boost exposure to cheap ‘risk assets’. In a report titled On Sale Now – European Blue Chips, Fidelity International European Equities fund manager Parus Shah said: “The only other time in recent times the European market was this cheap was in the early 1980s, when bond yields globally were significantly higher. I remain convinced that you need to be buying when others are selling stocks at distressed prices.”

Skandia Investment Group said underweighting equities was “potentially very dangerous… if any upward turning point comes, it is likely to be dramatic”.

Schroders’ multi-asset team said it was “unlikely to de-risk further and [is] looking for opportunities to pick up cheap assets”.

So for fund managers at least, the question seems fairly binary – risk on or risk-off? Allocators’ answers to this, at present, are typically ‘we remain risk off’, or at most, ‘very cautiously risk-on’.

One Italian allocator said spreads on his nation’s sovereigns over Bunds were only two thirds of the way back to the levels seen during the 1980s. Another noted general liquidity is, at best, still half its level prior to 2008.

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