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Managers Corner

Eurozone crisis – breathing space

31 Oct 2011
From

Leading international investment manager Threadneedle Investments, has commented on the Eurozone crisis.

Mark Burgess, CIO of Threadneedle Investments, said:

“As we felt they always would, having stared into the abyss, it appears that the European politicians have finally done enough to contain Greece for now. Given the large numbers of negotiating parties, the scale of the agreement is considerable and should be applauded. It has done enough to take the possibility of financial meltdown in Europe off the table. Haircuts will be taken, banks will be recapitalised and breathing space has been bought. We are not going to have a financial car crash, and against that backdrop, the rally in risk assets makes sense. Indeed equities are now back to the levels immediately prior to the market correction in early August. We have remained overweight equities and other risk assets throughout this period and would expect markets to gently rally further from here.

“What has not changed however is that the outlook for developed market growth is as challenged as ever. Europe will struggle to avoid recession next year, and the US will grow at less than 2%. Deleveraging will continue to provide a growth headwind as banks raise further capital and restrict lending. Developing market growth will continue to outperform, but will clearly be impacted by the developed world slowdown, as exports remain vitally important and consumption is still a relatively small part of economic activity.

“Within Europe, whilst breathing space has been achieved, the crisis has highlighted the Euro’s structural flaws; how does the system work without fiscal and political integration? Achieving this is going to be very difficult, and I would think will ultimately lead to a smaller Eurozone than today. Whatever the politicians think, taking their public with them on this is going to be impossible for many Governments. For Greece, even with the 50% haircut, they are still forecast to have net debt to GDP of 120% by 2020, not exactly sound finances!”

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