Neptune’s European Opps fund moves back to defensives

Neptune’s Rob Burnett has shifted his £946m European Opportunities fund back to a defensive stance in the view pressures in Europe, the US and China will result in ‘vulnerable’ markets for the rest of Q1.

The head of European equities has upped cash to 11%, selling on the strength of the recent rally, and increased exposure to consumer staples and healthcare in a bid to take a more neutral, “steady eddy” stance before market vulnerabilities surface.

“I have been moving the portfolio more defensive in the past few weeks as I think markets will be vulnerable from today to the end of Q1. I think there will be a blip in the US recovery, China will delay easing monetary policy and the eurozone crisis will flare up again.

“I have positioned the portfolio to how it was in July and August last year as I am expecting similar market conditions.”

1. EUROZONE

Burnett said concerns will be exacerbated by the amount of eurozone sovereign debt maturing – some €230bn in February and March – which will push yields higher.

He added investors, particularly in the retail space, have been buying Italian debt at auction but mainly at the short end of the market.

“This means the downward movement in yields is less and less, and when you get to 10-year debt it is zero. The shorter bonds are cheaper, which is a positive, but at the longer end there is no improvement. The same applies to Spain.”

He is concerned investors are not willing or confident enough to take a longer-term position in the countries which need it.

“Investors are not helping to finance these countries and buying at the shorter end is not enough to circuit break the problems in the eurozone financial system.”

He also said the banks will need €740bn of refinancing this year at a time when there is a a lack of trust between the banks themselves.

“The ECB’s long-term refinancing operation (LTRO) pumped liquidity in the system on 21 December. It is a good development from the perspective of the banks and further LTRO should help banks meet refinancing needs, but the bad news is this money is not being redeployed back into the system.”

He said during the Lehman Brothers collapse, banks deposited €300bn at the ECB. The figure was  €380bn in mid-2010 when Greece hit a wall, but is now at €530bn.

“It is being parked by the banks at the ECB for the sake of safety, but the banks are making a loss on this – they are paying 1% for it and only getting back 0.25%. This is indicative of the stress in the system – banks are not lending to each other, nor are they investing in sovereign bonds. It is a worrying sign”.

However, he said the “very good news” is inflation is falling rapidly.

“The PPI, the leading indicator of inflation, is in negative territory, which means the ECB can cut rates further and quickly.”

He forecasts a cut to to 0.5% by March, leaving the ECB to look at alternative options in easing monetary policy.

“If the pressures build in the next two monthsm the ECB could launch a small QE programme. I am not sure it would buy sovereign bonds, it is more likely to be covered bonds, but it will be a big change from existing policy.

He added this is likely to happen in the second half of March where we are also likely to see further movement towards the fiscal union at an EU summit.

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