Neptune sees relief rally in second Greek election

The second Greek election confirmed for 17 June could lead to a relief rally, particularly in European banking stocks, according to comments from Rob Burnett manager on the Neptune European Opportunities fund and James Dowey investment director and chief economist at Neptune.

Neptune’s overall view is to retain an underweight stance towards Europe’s banks for at least another year or two because of the significant structural challenges to European economies that have caused the crisis in sovereign debt markets and by implication to the ability for banks to sufficiently capitalise themselves.

Burnett’s fund also retains a position of pretty much zero exposure to the EU’s peripheral member states. Neptune’s usual approach is to look at sectors rather than countries when determining holdings in portfolios, but in this case it is different Burnett said. This is because the sovereign funding crisis is tied up with crisis in the banking system, in turn making life difficult even for good companies, whose shares are being hit by heavy discounting and pricing uncertainty.

That said, Burnett (pictured) expects a number of changes to occur in the coming two months that would possibly lead to a relief rally in European equity markets, but without necessarily impacting on the big, long term structural changes required.

There is a greater than 50% probability that the upcoming second Greek election will result in a properly functioning coalition, he said. Additionally, if the election is fought on a debate about Greece’s continued membership in the eurozone rather than simply whether austerity should continue or not, then it is likely that more moderate parties will get a bigger share of the vote than last time, in turn obtaining a mandate for some negotiation on less radical grounds than some proposed during the last election – such as the idea of Greece unilaterally not paying any of its debts back.

The second reason to expect a relief rally is that Germany cannot ignore the will of the French electorate. President Hollande is likely to push for some softening of austerity measures, but without necessarily tearing up the Fiscal Compact when the next EU summit takes place on 28-29 June. Some things which may be negotiated away include the commitment to a 3% fiscal deficit by 2013, which could instead be postponed by a couple of years, Burnett said.

Any softening of austerity will be taken by the markets as a signal of possible faster growth.

The third factor is capitalisation of Spain’s banking system. Neptune’s own research suggests a €60bn bill to ensure the system meets the 9% core tier 1 ratio required by Basel III. In turn, propping up its banking system could take the Spanish debt to GDP ratio 5% higher to 89%. But, this is a price worth paying Burnett said, because it would attack the core of Spain’s problem, which is its weak banks. Major capital injections could come by early July this year.

Thus, taken together these three changes outlined should lead to some relief amidst the crisis.

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