Mark Dampier: Markets losing patience with eurozone crisis
Saturday 17 September 2011
It has become impossible to look at the prospects for stock markets now without considering some kind of resolution to the euro crisis. Across the pond the Americans have problems as well, but at least they have a currency that they are able to readily devalue. European politicians seem content to kick the can further down the road and, in the absence of firm action, investors remain nervous about equities, and in particular European equities, which have fallen particularly heavily. Political commentators generally seem to think the sticking plaster policies will continue. But the markets are in an impatient mood and I think we are nearing the point where they force politicians' hands.
The increase in Spanish and Italian bond yields now seems to be driving the crisis at a faster pace. With 10-year bond yields at around 5.5 per cent, an increase of 1 per cent or so might just push the whole thing over the edge. To me it is eerily reminiscent of September 1992, when the UK was ejected from the European Exchange Rate Mechanism. We have Greek politicians still, on the whole, denying any great problems exist and rushing to push through asset sales to pay back an amount of debt which appears unpayable. For Greece we need to see debt forgiveness, probably of at least half the debt. While this would solve Greece's problems, at least in the short term, it wouldn't necessarily be a resolution to the crisis. Banks would crystallise heavy losses on their bond holdings and the spotlight would turn to other indebted countries. The crux of the problem for the markets is that investors can see no clear way through this crisis, and it is even difficult to see what options are left. Will the Germans ultimately leave and go their own way? Will the Greeks leave and return to the Drachma? And where is the line in the sand drawn? Does the entire Southern Europe bloc end up leaving? None of these are palatable options. They will all be hugely disruptive and expensive. Unfortunately the more you look at the numbers the more impossible it all looks, not only in Greece but elsewhere. According to Chris Rice of Cazenove, Italy must refinance £300bn of debt a year for the next few years. As he says in a recent newsletter: "With nominal GDP barely growing it's a non-starter as a policy."
Given the impossibility of the situation, an answer for the Germans might be to just let Southern Europe go. The Germans have been huge winners from the single currency. As one of the world's major exporters the currency level they are enjoying is probably 40 or 50 per cent lower than if they still had the Deutschemark. It has made German companies exceptionally competitive. You just have to look at the Swiss Franc to have some idea of what might happen if the Germans went it alone. What would be the impact? A German recession, but quite possibly a big buying opportunity for European equities outside Germany.
So what do investors do? Remember with the ERM ejection in 1992 the markets fell precipitously initially, but then rebounded strongly. The whole episode was a golden buying opportunity for UK equities. My feeling is still that you should ensure you have cash in your portfolio to give you the option to buy more equities and corporate bonds if markets fall. If there is a large fall, I think it will herald a major buying opportunity.
My suspicion is the markets will at some stage lose patience with the European crisis. Muddled promises of austerity measures and fiscal integration will no longer cut the mustard. I may be wrong, but I think the volatility we are seeing suggests otherwise.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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