For investors there is no quick fix, say Wells Fargo AM managers Wilson and Norris
Peter Wilson and Tony Norris, portfolio managers at Wells Fargo Asset Management, say that there is no quick fix to Europe’s financial troubles.
Last Thursday’s ECB meeting brought the expected announcement about potential bond-buying support for eurozone countries in trouble. “Unlimited”, theoretically anyway, is the fire-power the ECB now has through its outright monetary transactions (OMT) programme. Bond buying to support members of the eurozone, but only if they ask. If countries ask, this support will come with as yet undefined conditions (why wouldn’t it!?). These conditions are required to enforce structural reform and discipline so that one day they can get back on to a better footing. Euphoria, for now, but hard work and lots of it lies ahead.
So the eurozone is now firmly back in recession. There is no quick fix, or one particular action that will solve its problems, but there has already been considerable progress on many fronts, including an alphabet’s-soup of structural reforms such as EFSF, ESM and LTRO, (from last Thursday) OMT, the Fiscal Compact, unified banking regulation supervision and acknowledgement of a more pro-growth policy response. September is a crowded month for EMU news but a far better picture of how all these measures will come together will be known by the time we reach October.
Let’s face the realities: a break-up of the eurozone is not in the interests of any state or political party and a full resolution – or fudge – will in time be found. Such a resolution will not be a ‘cure’, though, and will leave the eurozone probably no better, but no worse, than the USA, UK or Japan.
In the meantime, yields in the core euro economies remain poor value and it therefore makes sense for investors to be under-weight the region. The positives for the Euro (trade neutral area, main currency diversifier for foreign exchange reserve assets) currently remain offset by the problems from the periphery and the recessionary backdrop. It must be said, though, that when factoring out the risk of FX problems the accrual levels received from investing in Spain and Italy could be compelling.