Why a binary view on Europe is dangerous for investors

Polarised views over the eurozone are dangerous for investors and increase their risk of getting burned by the markets, said Aberdeen’s Aidan Kearney.

Kearney, who runs Aberdeen’s multi-asset offering with co-head Graham Duce, said uncertainty across the eurozone has made any kind of bold move a very risky one, and investors drastically changing their strategy should be more cautious.

“Between now and 17 June [the Greek elections], it is impossible to have any sort of clarity so you almost have to remove yourself from it,” he said.
Investors are divided into two camps at present – one set of investors sees moving defensive as their best option, while the other group is waiting for the next round of policy actions as a trigger to add risk. Kearney said trying to time the market with risk on/risk off plays is unlikely to reward investors.

“If the market deteriorates, prompting the next round of policy actions, the taps will be turned on and the market will rise. But if you miss these sorts of moves it becomes difficult to catch up. We do not see this as a good idea either,” he said.

Investors who change their investment philosophy in an attempt to play politically-driven market swings should be more cautious, he said.
“We have always said things will have to get a lot worse before policymakers step in. But do you change your investment outlook totally to get on the right side of that risk on trade when it comes along? That is where you have to be cautious,” he said.

 “The market has become completely binary, which is dangerous for everyone, and we are trying not to get caught up with that.”

At a recent strategy meeting at Aberdeen, Kearney said the consensus view was that the euro will ultimately survive, adding investors who foresee a ‘Grexit’ might as well not have their money in the markets.

“If you believe Greece will come out of the euro then you should not have any money invested. The bottom line is the ‘muddle through’ scenario still seems the most likely.”

According to Kearney, much of the potential downside in markets, such as the recapitalisation of Spanish banks and further deterioration of the Greek political situation, has already been priced into stocks.

“We do not believe the market can price in Greek euro collapse because it does not know what the consequences are,” he added.

Kearney favours fixed income as an alternative to equity risk, but is mindful that the fixed income markets have already enjoyed a good run this year.

He recently bought into Schroders’ Strategic Bond fund, managed by Gareth Isaac, because he favours his conservative approach. “If you do not want to take the equity risk then credit is still offering decent single-digit returns,” he said.

“But we recognise credit is still a risk asset and we cannot assume anything is ‘risk-less’ anymore, even US treasuries. Our exposure to Isaac brings that balance in,” he added.

Kearney and Duce also favour the US recovery story and have bought the Allianz US High Yield fund to reflect this view.
“We do like the US dollar. Even if it is structurally flawed in the long-term, we recognise it is the place you want to be when things get tough,” he said.

Meanwhile, Kearney has sold out of the Walker Crips UK High Alpha fund, which has now been rebranded the Liontrust Macro UK High Alpha fund.
He said the move was not performance related but connected to adapting the blend of the portfolio.

 

This article was first published on Investment Week

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