Fund managers react to Italy downgrade

Silvio Berlusconi reacted angrily to S&P’s downgrade of his country’s sovereign debt, but fund managers’ response was more measured.

Alberto Chiandetti, portfolio manager at Fidelity’s FF Italy Fund, said: “First, it is important to recognise that the markets have been anticipating this downgrade and the news is already largely priced in. Therefore, I do not expect any major short-term impact as a result of (yesterday’s) announcement. 

Chris Bailey, head of global direct investments at Close Asset Management, said: “The rather benign reaction by the markets (yesterday) reflects the inevitability of some of these moves as well as continued buying of European government bonds by institutions like the ECB.”

John Redwood, chairman of Evercore Pan Asset’s Investment Committee, said: “As we feared, the battle for Italy is not going well. The European Central Bank has been buying more of (Italian debt) in a desperate attempt to keep the price up and the cost of borrowing down. It is important for the Euro that the battle for Italy goes better.”

“The issues underlying the Italian downgrade are not easy to fix,” Bailey said. “Structural budget deficits are notoriously difficult to close in times of low growth and low growth forms a clear negative feedback loop with poor employment opportunities and low consumer confidence. This induces lower growth as individuals and companies become reluctant to spend. Italy’s political malaise just adds to the colourful mix.”

The Italian downgrade is an indication of a more serious Europe-wide problem, said Chiandetti. “While the downgrade has brought Italy into focus, I still believe that this is not a single country issue but a Europe-wide issue. Thus, this serves as another alarm bell to European politicians and the European Central Bank to understand the urgency of finding a path towards halting its debt issues and the resulting market contagion.”

David Simner, portfolio manager, Fidelity Funds Euro Bond, added: “European finance ministers (at the EcoFin meeting in Poland) failed to offer any concrete plan to halt the region’s debt crisis. I expect the high level of uncertainty to persist in the next few weeks. I’m maintaining a high level of liquidity in the Euro Bond portfolios, avoiding losses and tactically taking advantage of potential market dislocations.”

David Miller, partner at Cheviot Asset Management, also picked out uncertainty as the main factor affecting investors. He said: “Investors are wary that both potential scenarios – a chaotic default or a proper solution in the Eurozone – would have a material effect on markets. This is why markets are so volatile and directionless.

“The downgrade of Italy’s credit rating will have little effect on the pricing of other assets, and we can see from the FTSE (yesterday) that the downgrade has not had a great impact on price movements. The core problem now is that this uncertainty is starting to affect spending decisions, both corporate and personal. We are potentially looking at downward spiral, as the IMF stated.”

Fidelity’s Chiandetti added: “At the moment, we are in a negative feedback loop between debt markets and fiscal tightening. Austerity measures and debt concerns at a time when countries need stimulus results in a further slowdown in economic activity and a call for fresh fiscal tightening. This has created a vicious cycle that has spilled over to all but kill market expectations.”

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