SLI’s GARS sees opportunity in volatility sparked by eurozone crisis
Frances Hudson, global thematic strategist at Standard Life Investments, says products such as SLI’s Global Absolute Return Strategies (GARS) fund are likely to buy into volatility as an asset class through the ongoing eurozone crisis.
The volatility expressed in the equity, bond and currency markets all represent opportunities, as Europe continues to wrestle with the implications of contagion spreading to Spain and Italy.
While it may not be fair to tar all eurozone members with the same brush, volatility is expected and markets cannot yet spot the bottom of the crisis, Hudson says. Use of phrases such as ‘selective default’ and other terms send another message to the markets. Overall, other than Germany the eurozone is looking weak, she adds.
“If contagion continues there’s a real danger.”
Politicians are still kicking the can down the road, she says.
Meanwhile, SLI including GARS are taking advantage of the euro crisis. For example, it is short euro and long dollar, short euro long NOK. It has been long the CHF, but that is up about 20% against the dollar in 2011 to date, so Swiss exports are expected to be hit. Therefore in the medium term the CHF could be overvalued, Hudson says.
Volatility as an asset class is a positive area in which to invest because of expectations it will continue going forward. Hudson believes that one reason Spain and Italy have been hit now is that markets are actually expressing their frustration with Portugal, Ireland and Greece by proxy. She says that with funding markets effectively closed for the PIGs, market participants are looking for another way to express their negative sentiment, which is being re-directed towards these other two countries.
SLI does not hold peripheral eurozone sovereign debt, Hudson says, and as a bottom up stockpicker will continue to buy into those companies that look good on fundamentals, even if based in any of the stricken countries. She notes the example of Jerónimo Martins, a Portuguese food distribution firm that does about half its business in Poland.
However, energy utility stocks should be avoided because of the danger cash strapped governments could respond by applying additional taxes on their relatively stable cashflow. Banks are best avoided too, partly because they are linked to the origins of this crisis, but also because banks in countries not directly hit are also exposed, such as French banks, she says.