Dominic Rossi, Global Chief Investment Officer of Equities at Fidelity Worldwide Investment, said “markets have reacted positively to the intent shown by policymakers, yet my overall view is that the deal is not the game changer investors are looking for. Italy’s 120% debt-to-GDP (gross domestic product) doesn’t look any more sustainable today than yesterday. Europe is destined for a multi-year workout during which economic growth will be very restrained and equities are likely to remain cheap. The path of equities will therefore require better news elsewhere. Earnings growth in the United States continues to surprise on the upside and we may be approaching a policy shift in China. The catalyst for higher equity values lies outside Europe rather than within.”

Trevor Greetham, Director of Asset Allocation, at Fidelity Worldwide Investment, said “the European Union leaders surprised positively after the squabbling of recent days but were low on detail on the critical point of leverage for the bail out fund to backstop Spain and Italy. We may have to wait until November for specifics of possible BRIC/IMF (Brazil, Russia, China, India / International Monetary Fund) involvement alongside a partial insurance scheme for primary issuance. The critical test will be what happens to the eurozone economy. Provision of liquidity goes hand in hand with further austerity in the periphery with Italy now the focus. Meanwhile, if the United Kingdom experience is any guide it will be hard for national regulators to prevent banks deleveraging their balance sheets now forced public capital injections are threatened.”

Richard Skelt, Fidelity portfolio manager, said “the agreement lessens the risk of systemic shock once the agreed mechanisms are in place, and markets are responding positively to this. Looking out beyond the immediate relief rally, a number of headwinds remain. There is a continued policy emphasis on austerity at the expense of growth within Europe which will create a drag for the southern European countries particularly, and the measures imposed on the banking system are also likely to be negative for credit and growth. The longer term path for equities will be determined by the economic cycle globally and less so by political activity in Europe.”

Eugene Philalithis, Fidelity portfolio manager, said “I think the package makes significant progress in terms of the various bank funding and liquidity channels, although some details still need to be resolved.  The proposals to leverage the European Financial Stability Fund and expand its scope are also positive for sovereign funding liquidity. The agreement on the bank recapitalisations is also a significant step forward, the intention of governments being to prevent banks meaningfully shrinking their balance sheets through selling assets or cutting off the supply of credit to the economy.

“Anecdotally, I had a meeting with a bank loans manager this morning who mentioned that banks will most likely dispose of non-core assets, such as infrastructure loans and possibly commercial real estate, while keeping the corporate book largely untouched as it is performing well and pays more than their cost of funding.  But the supply of new credit to the economy could still be hampered, which is likely to be negative. The statement made it clear that private sector Involvement in Greece is a special case, and it will remain to be seen whether the markets accept this and contagion is prevented.  But even with a 50% haircut in Greek government debt, the debt:GDP ratio is expected to fall to 120% by 2020, hardly providing an immediate solution to the solvency problem. 

“Concerns still remain with the lack of detail on implementation for some of these schemes, but there is another meeting in early November where more detail may be provided. Finally, the commitment to enshrine fiscal prudence within national legislation means more austerity is on the horizon for Europe, which leaves the European Central Bank as the only solution for growth.  Without looser monetary policy growth prospects in Europe do not look bright. I think we will see a relief rally in equities and bank debt, as well as peripheral bonds (excluding Greece), and a stronger euro potentially, but at some point the economic fundamentals may overwhelm the initial optimism, so I will take a cautious approach to adding risk.”

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