Fund managers suggest investors look to eurozone’s positives

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Written by Ray Clancy

Thursday, 02 December 2010 09:23

All is not bad for investors in Europe despite many being sceptical, cynical and negative, according to experts specialising in the region.

‘Lots of people see Europe as doomed, like a ship that has been torpedoed and is sinking. The sovereign issues the solvency of their banks is hardly helping. However, all is not bad,’ said Oliver Kelton, co-manager of the Waverton European Fund at JO Hambro Investment Management.

He points out that Europe is very much a beneficiary of global growth. ‘The eurozone exported 20% of its GDP in 1995, now that figure is 36%. This compares to the US exporting 11% of its GDP, almost the same number as it was in 1995. Almost 50% of Eurozone corporate sales are now outside of Europe,’ he said.

He also says that there is an emerging productivity story. ‘Unit manufacturing costs in Germany have fallen 20% since 1995, relative to a rise of 3.5% increase for the rest of the eurozone. If Europe wishes to get access to capital markets, it will have to take the necessary measures to reduce wasteful spending and improve productivity,’ he added.

And savings ratios look much better than other countries such as the US. ‘Savings ratios in the eurozone were around 10% going into the crisis, compared with -4% in the US. This suggests the domestic demand story maybe more resilient than some believe. In fact, lending in the private sector grew 1.4% in October, suggesting the overall eurozone is less affected by the periphery than feared,’ explained Kelton.

Meanwhile, European Central Bank President Jean-Claude Trichet has indicated that officials may be willing to step up their response. Policy makers must assert authority to fight the demanding market conditions, Trichet said. ‘We need a sense of direction. Observers are tending to underestimate the determination of governments,’ he added.

But some economists doubt policy makers would be able and willing to head off sovereign default. ‘We’re waiting for someone to say the emperor has no clothes. We’re waiting for people who have spent 12 years explaining what a great thing euro is to admit they were wrong,’ said Charles Dumas research director at Lombard Street Research in London,

‘This is not the time to experiment with money-market operations. A significant increase in ECB bond purchases to the extent that is feasible would signal that it is providing a crucial policy back-stop that would halt the increase in periphery bond spreads,’ said Peter Westaway, chief economist at Nomura International.

The ECB may be forced to follow the Federal Reserve and Bank of England in conducting quantitative easing in which it buys assets to inject cash into the economy and doesn’t offset the purchases as it does now, according to Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co in New York.

As the crisis deepens and threatens core countries, the future of monetary union continues to be called into question. As the situation becomes more desperate, the unthinkable has to be thought. Quantitative easing by the ECB may be one of the few ways out,’ he explained.