Euro looking safe in the short term but eurozone investment needs tactical approach

A tactical approach to investing in Europe is needed right now with problems still surrounding the eurozone, according to experts.

The future of the euro looks safe, in the short term at least, Ireland’s export machine offers hope for a brighter future and Spain and Italy provide the most attractive investment opportunities in the peripheral' Eurozone countries, according to Brendan Murphy, co manager of the BNY Mellon Global Strategic Bond Fund.

The eurozone's sovereign debt crisis continues to dominate the headlines. This year has already seen high profile financial rescues for Ireland and Portugal, while Greece looks set to receive its second European Union bailout, just over a year after its first, and the creation of a new, permanent bail out fund, the European Stability Mechanism, which will come into force in 2013.

There has also been speculation in recent months that Greece might leave the euro, while in Germany, the electorate has voiced its discontent that the country is shouldering the financial cost of its heavily indebted European neighbours.
 
‘While a break up of the eurozone is, of course, possible, we don't believe that it's likely any time soon. A departure from the euro by Greece or Germany would be in neither country's interest at present,’ said Murphy.

He points out that the UK is taking a series of painful measures aimed at cutting its fiscal deficit and this action is, for the time being at least, satisfying the holders of UK government debt and helping to avoid the problems dogging other parts of Europe.

Murphy said that the UK has the added benefit of having its own currency in such a tough economic environment. ‘Sterling can be allowed to weaken against other currencies which is good for UK companies that export their goods and services, as a weaker sterling makes their prices cheaper for foreign buyers. This, in turn, can provide a welcome boost to the UK economy,’ he explained.

With many of the economies in the periphery of Europe facing troubled futures as they attempt to ease their finance problems, such an environment can provide opportunities for investors. For example, within the Eurozone's government bond markets, Murphy and his team at Standish currently see opportunities in Spain and Italy, given that, unlike Greece, Portugal and Ireland, they aren't struggling to meet their long term financial obligations.

‘Clearly, these two also have their issues. Italy has high public sector debt but low levels of private sector debt and avoided a housing market or banking crisis, while Spain experienced a housing bubble. However, they have relatively low levels of public debt and have demonstrated a willingness to tackle the issues in the banking sector. Meanwhile, we believe Greece remains in the greatest trouble, and we would expect to see a restructuring of Greek government debt at some stage, although not in the near term,’ he said.

‘The high profile problems in Greece and Portugal are small in relation to the Eurozone as a whole, but the danger of contagion from country to country is great, via a highly interconnected banking network, so the goal of policymakers is one of containment in order to allow countries such as Spain and Ireland to resolve their problems and get back on the road to economic recovery,’ he explained.

‘Of Greece, Portugal and Ireland, we believe that the prospects for Ireland are the brightest, given that its economy can still boast robust structural fundamentals despite the poor health of its banking sector. It also has better prospects for economic growth given that it is highly competitive and able to capture the demand for exports from outside the Eurozone. It should, therefore, be able to grow itself out of its problems,’ he added.

But until the eurozone issues are fully addressed, Murphy believes it is premature to make any long term investments in the debt of peripheral Eurozone countries. ‘We have chosen to steer clear of the debt issued by Portugal and Greece for the time being, but have initiated some short term positions in debt issued by Italy and Spain. In short, until there is a long term resolution we will look to play the region tactically, taking advantage of opportunities as and when they present themselves,’ Murphy concluded.