Fund managers give guarded welcome to rescue deal
Finance practitioners generally echoed the welcome markets gave to details of the latest, expanded eurozone rescue deal, but said the “eye of the storm” will now move to focus on Italy and its beleaguered ruling coalition.
Dan Morris, global strategist at JP Morgan Asset Management, said the market’s initial reaction – equities, commodities and euro rising, while government debt fell – was “quite positive. Key to this reaction has been the management of expectations by the eurozone’s leaders. They were aware of the need to stick to the goals already set out while acknowledging that all the details would not be finalised for this summit.
“Eyes will now turn to the next summit in early November, but as long as there is continued progress towards these objectives, investors should go on signalling their approval.”
Dominic Rossi, global chief investment officier for equities at Fidelity Worldwide Investment said eyes would turn immediately to Rome.
“The eye of the storm will now move to Rome and its fragile government. I don’t think yields on Italian debt will fall on the back of this agreement for long.”
He said if the rescue fund was not on a sound equity base, saying it would be leveraged many-fold was just “a heroic piece of financial alchemy.
“It’s effectively an insurance company selling protection against its own default. You can understand why the insurance company would want to sell it, but it is yet to be seen whether the Chinese would want to underwrite it.”
“The path of equities will therefore require better news elsewhere. Earnings growth in the US continues to surprise on the upside and we may be approaching a policy shift in China. The catalyst for higher equity values lies outside Europe rather than within.”
He said the deal announced by leaders after 4am this morning was “not the game changer. Italy’s 120% debt-to-GDP doesn’t look any more sustainable today than yesterday. Europe is destined for a multi-year workout during where economic growth will be very restrained and equities will remain cheap.”
Recapitalising banks was “a step in the right direction,” in Rossi’s view, and the 50% write-down on Greek debt they will suffer was “an important step forward”.
Rossi added that giving banks to June to raise their cash buffer ratios to 9% “allows them to sell assets rather than just go directly to public markets, which would prove difficult. The sanctions on bank dividends and bonuses should ensure this gets done.
“The €106bn in fresh capital will ensure a new minimum of 9% Tier 1 capital ratio for euro area banks. I believe that stronger banks will strive to be well above this level. The impact on growth in the short-term will be a negative as the deleveraging process continues, but a better capitalised banking system has got to be good in the long-term.”
Clear Currency’s Peter O’Flanagan said: “There seems to be some light at the end of the tunnel for the indebted eurozone.”
But he added: “For now the euro has rallied, and risk-correlated assets are on the rise, but this may be short-lived as the reality of the size of the task in front of the eurozone sets in.”
Today markets will be gauging their own reaction to the package, but also eurozone confidence data due out this morning, then US GDP figures this afternoon.