European equities could drop 30%, says ING IM
Systemic risk in the Eurozone has not been priced into equities and if the Eurozone breaks up, equity valuations could drop another 20-30%, said Patrick Moonen, senior strategist at ING Investment Management.
“If the EU breaks up, it would put the financial sector in danger, causing everything to stop and unravel very quickly,” Moonen warned.
In terms of how quickly such a tail risk event could unfold, Moonen referred to the Lehman Brother’s bankruptcy in 2008 which brought global markets crashing down in a matter of months.
“The next [tail risk event] could move even faster than that – in a matter of weeks, not months,” Moonen added.
Although Moonen believes the likelihood of systemic risk leading to a Eurozone breakup is small, ING IM has adopted some tail risk measures in its global asset allocations to counteract such an event.
ING IM’s tail risk strategy involves increasing exposure to precious metals and keeping underweight equities.
Where it does invest in equities, it allocates to defensive sectors such as telecoms, utilities, healthcare and retail (food, not apparel).
ING IM remains underweight what it considers riskier equities such as commodities and real estate as the short-term uncertainties about the future of the Eurozone remain too high, Moonen said.
This is in part because the Eurozone leaders’ recent promise to boost the firepower of the European Financial Stability Facility is still very vague, he added, and it is not clear how they will reach their $1trn target.