Managers see opportunity, despite fragility of single currency

With elections in France underway and Greece going to the polls on 6 May, the UK’s Association of Investment Companies polled managers of Europe funds for their views.

What do you think the outlook is for Europe over the next five years?

Stephen Macklow-Smith, manager, JPMorgan European Investment Trust plc said: “We think that much depends on continued growth outside Europe, which could allow Eurozone countries the respite to work through their problems. Masked within the general term ‘austerity’ are efforts to improve competitiveness by reducing labour market regulation, enforcing budgetary discipline by embedding it within national constitutions, and forcing banks to reduce their leverage and improve the flow of credit to the local economy. This will be tested, however, by elections in Greece and France and by the Irish referendum on the Fiscal Compact, where we will be able to gauge the public appetite for further reforms.”

John Bennett (pictured), manager, Henderson European Focus Trust plc said: “The world has favoured developing over developed economies for some time now but investors forget GDP growth does not correlate with stock market growth. There are bargains to be found in developed markets, especially Europe. The short-term is likely to see yet more volatility, scares, panic, plunges and rallies as the Eurozone crisis deepens. Therein lies the long-term opportunity. We are struck by the premium investors are now paying for “certainty” (bonds)while they flee from volatility (equities). The next two years are likely to offer a fabulous entry point in Europe. It will require bravery to optimise that opportunity.”

Over the shorter-term, have the prospects for Europe improved at all this year?

Stephen Macklow-Smith said: “Prospects for domestic Europe have, if anything, deteriorated this year, as austerity bites in the periphery and this slowdown pulls down the Eurozone members who are not affected by concerns over sovereign debt. More broadly, though, global growth appears to be improving, and this is very good news for European corporates, which generate around half of their revenues outside Europe.”

John Bennett said: “Outside of the individual sector outlooks, overall we feel there is a case to be made for investing in western equities and Europe at this time. We do not think the shift to bull conditions will necessarily happen tomorrow, next month or even later this year but we are entering the final stages of a long bear market. That stage can of course be drawn out and will inevitably involve much volatility. Thus, we may not have seen the lows…However, at 12 years, this bear market is long in the tooth and the catalysts for change are happening. You need bad macro news and a recession before we can enter a bull phase once again and we now have both.”

Will the single currency survive intact?

John Bennett said: “In its current state my guess is no. Ultimately it will come down to Germany. If the periphery (which risks sucking in France) continues to undergo force-fed German medicine then we are likely to see a revolt of some sort. We are seeing signs of this even with the breaking of the Dutch government. If Germany wants to retain the Euro, Germany will have to pay. That would likely mean some form of Eurobond. This is precisely what the market will push for in the coming months.”

Stephen Macklow-Smith said: “The chances of a single country exiting the euro have certainly risen in the last 12 months; however we have always been firm in our belief that if those within the Eurozone want the currency union to survive intact, they have the wherewithal to ensure that it does. If there is any sign of a weakening in their resolve, then we can start to worry.”


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