Investors advised to avoid Eurozone exposure
Investors should seek to avoid significant exposure to the Eurozone, as fears of contagion are likely to hit equities, fixed income, currencies, and financials, but risk appetite remains
European developed market equities, fixed income, and currencies remain less attractive investments as fears of contagion within the Eurozone persist, according to the latest findings from HSBC.
European equity markets are expected to lag compared with the US and Asia, as the recent Irish bailout failed to provide encouragement to markets.
Concerns that Portugal or Spain could be next, coupled with a lack of clear signals from European policymakers about their intended course of action are likely to affect equity performance, it says.
Appetite for riskier assets remains, however, with emerging markets’ equities recommended over those in developed markets.
European bond yields to suffer
Fixed income yields in developed markets meanwhile remain low, hampering the potential for return, according to the bank.
Returns are predicted to be further limited through increasing inflationary pressures. High yield bonds, which benefit from declining defaults and risk appetite, are instead advocated.
Sovereign debt concerns in the Eurozone have caused the bank to downgrade its view of EURUSD currency performance.
In emerging markets, currencies with strong fundamentals are expected to see an increase, while the USD receives a better outlook following its QE2 injection.
Financials are given a warning, as the Irish bailout is stretching the ECB’s resources, amounting to day-to-day liquidity concerns.
Uncertainty brings benefits
But contagion fears continue to provide a beneficial environment for safe haven assets, including CHF, says HSBC.
Gold is also expected to stay strong, though its recent rally may not be maintained. The appreciation of USD could slow down gold’s price drive, the bank says.
Eurozone contagion risks are highlighted for Portugal, Spain, Italy, and Belgium due to the latter’s weak banking sector. Even France could be hit by debt valuation pressure.
Fears are raised over the capability of the ECB to tackle any further bailouts, especially in Spain which would require a higher amount than Greece, giving further cause for concern to European investors.