Short-termism exacerbating financial crisis

Europe’s financial crisis has opened up opportunities in the equities and bond markets but these are undermined by growing short-term pressures from investors worried about the safety of their investments, according to Paulo Gonçalves, coordinator asset management at Banco Popular in Lisbon.

Until now the European Central Bank’s (ECB) has sheltered senior bond holders, unlike in the UK where equities and bond holders have faced substantial haircuts, he said. “Right now there are big opportunities in Portuguese senior bonds from [major] Portuguese banks for example. Senior bond holders have been protected.”
This is likely to continue for the next two or three years as banks struggle to finance themselves and raise capital. “If senior bond holders are not protected it would close the bond market for the banks. They are already almost closed, but it would be even worse.” European banks have very big refinancing needs over the next two or three years, he said.

But there are risks. If shareholders fail to provide the extra capital, governments may intervene.

For investors there is “more of an upside in equities than in bonds for the same issuers, but the downside is much bigger on the shareholder side than on the bond side. The risk is much higher,” he said.

Also, while there are big opportunities in senior bonds, most Portuguese investors are already stretched and with large exposures, limiting their capacity to invest.

International players could fill the gap, but they a4re staying away from perceived peripheral markets.

There are also big opportunities in core eurozone countries. The sharp falls in share values in Germany in the Summer has led to some very cheap equities, but the danger is that until the politicians take firm steps to resolve investors will still face big potential losses.

Investing long term would be the sensible answer, but this is easier for pension funds or insurance companies to do than for retail investors. Retail investors have sharply shortened their investment perspective and this will be a problem for Europe in the future, causing a financing problem in the equity markets.

This will be a problem for Europe as a whole not only for Portugal. Private retail investors and institutions are not investing in the time frame of four or five years, or even for 3 years. They are investing for one year or half a year. “It’s impossible to invest in equities with such a short time frame. It doesn’t make sense,” he said.

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