Risk aversion rises sharply as doubts remain about Eurozone

News - Banking

Written by Jade Stewart

Thursday, 01 July 2010 10:43

Risk aversion has increased sharply as doubts about sovereign debt increases but a modest global recovery is still likely, according to experts.

‘Doubts about sovereign creditworthiness and the economic recovery have led to a torrid performance from equity markets in the second quarter of 2010. With government bonds in the US, Japan and Germany rallying, risk aversion has increased sharply,’ said Keith Wade, chief economist at Schroders.

But the company is confident of a modest global recovery although it does not think there will be a quick solution to the sovereign crisis. ‘In the near term, cyclical indicators look set to turn down as the boost from the inventory cycle fades and investors are likely to be debating the double dip through the summer,’ he explained.

‘However, markets are already behaving as if we have gone back into recession. The more risk averse areas have outperformed, and equity valuations are looking attractive again. Consequently, we maintain a modest tilt toward risk assets, hedged by holding some high quality bond exposure, gold and by avoiding the Euro,’ he added.

But weakness in southern Europe is likely to continue for some time, according to Azad Zangana, European economist at Schroders. ‘This is likely to have a direct impact on aggregate European growth along with indirect impacts which include trade channels, financial markets, and the spread of contagion to sovereigns,’ he said.

The key question for the markets is whether or not the sovereign debt crisis could cause a double dip recession. ‘Taking a close look, we think downside risks to wider Eurozone GDP growth are limited. The weakness of the Euro has already boosted export orders, though more export oriented member states are more likely to benefit than the rest. As a result, Eurozone growth is expected to remain positive, but will be more uneven across member states,’ said Zangana.