What does 2015 hold for the European periphery?
On January 25, left-wing, anti-austerity party Syriza won the elections in Greece. Legg Mason’s Negri and Brewin Dolphin’s Gutteridge were among the many who correctly predicted the electoral outcome.
The two managers talked to InvestmentEurope about their views on what 2015 holds for the so-called “European peripheral countries.”
As concerning as it might be, Greece is not the only one Gutteridge and Negri are mindful of this year. Towards the end of 2015 Spain will be holding a general election, at a time when the country has seen the ascent of left wing anti-austerity party Podemos, which won five seats at the last European elections.
Meanwhile in Italy, prime minister Matteo Renzi is trying to implement labour reforms which have sparked controversy among workers and trade unions.
Volatility in the periphery is likely to be a theme of 2015, according to views of analysts and those working in the affected markets. “In 2015 we would expect the political landscape in Europe to remain volatile; shaped, in particular, by Greek elections and a controversial labour market reform bill in Italy,” says Ben Gutteridge, head of Fund Research, Brewin Dolphin.
“This will no doubt translate into continued volatility for European asset prices but, given the policies already put in place by the ECB, peripheral equity markets and bond yields should be well supported.”
According to him, the attractions of TLTRO funding and the provision of ABS purchases from the ECB could be means to help peripheral bank lending rates to further converge with those of the core – France and Germany. “We would expect euro weakness to persist and so some hedging is advised but, with a cautious outlook for sterling, it is not the most important investment decision,” he says.
QE WAS ‘INEVITABLE’
Marco Negri, country head Italy at Legg Mason Global Asset Management, also rightly pointed out that 2015 will be dominated by the ECB and its continuing efforts to stimulate the eurozone economy.
“Sovereign QE was inevitable. It is the only viable way of expanding the ECB’s balance sheet to the level president Draghi has stated as an ‘intention’.
“This, as highlighted by our bond affiliate Western Asset, will be supportive of eurozone government bonds in general and periphery bonds particularly. Risks do remain for peripheral bond yields. If nominal growth remains very subdued, the government debt to GDP dynamics look troublesome, particularly for Italy,” he says.
In Negri’s view, the ECB will continue to try to ensure that growth is supported and that inflation expectations begin to rise again.
As for Renzi’s labour market reforms, he says: “While important in the medium term for lifting growth potential, the reforms are positive in the short term as they reassure markets that structural reform is ongoing in Italy.” Elections are the other main risk to Legg Mason’s positive view of periphery government bonds, Negri adds.
“Elections in Spain and Greece, with the potential for anti-austerity parties to emerge as the winners, could lead to the market questioning the unity and commitment of eurozone members to the current policy regime and ultimately the inviolability of the euro,” he argues. With the Spanish elections likely to be towards the end of 2015, the main source of political instability will come from Greece.
The victory of Syrzia seems set to spark volatility in periphery bond markets. “However, we believe any volatility would be short-lived as Greece is no longer systemically important, and the Greek government would have as much to lose as gain from trying to call the EU’s purported austerity bluff,” Negri concludes.