LONDON (Reuters) – The euro zone’s policy tilt towards growth from pure austerity may be necessary to retain confidence in the shared currency but what is on the table looks too puny to shift the dire investor mood.
Asset managers who resumed their flight from euro stocks and bonds last month – after a first-quarter boomlet inspired by the European Central Bank’s cheap money – reckon that the best European Union leaders can hope for at their hastily-scheduled summit on May 23 is to contain the damage.
The prospect of infrastructure spending via a recapitalised European Investment Bank or case-by-case postponement of deficit cutting deadlines will not on its own provide the “game changer” needed to draw the private investors back to into any but the most solid euro assets.
“No, not yet. Our risk budget remains extremely limited and will remain so during what looks likely to be a very tricky period,” said William de Vijlder, chief investment officer at Brussels-based BNP Paribas Investment Partners, which has more than 500 billion euros of assets under management.
EU officials said on Tuesday that member countries must find ways to boost growth at the same time as putting public finances in order and this month’s summit would discuss how to achieve these twin aims.
The flurry of activity follows Sunday’s victory for Socialist Francois Hollande in French presidential elections and big gains for anti-austerity parties in parallel Greek polls. With Ireland due to vote in a referendum on the euro fiscal pact on May 31, momentum for a shift has been building for several weeks – driven by left-leaning parties across the zone but supported by concessionary noises from German Chancellor Angela Merkel and ECB chief Mario Draghi.
Yet many investors reckon the sort of euro-wide growth boost that would significantly offset the years of debt-cutting will, for now at least, remain unacceptable to Germany.
“It really calls for a completely different order of response from Germany and I just don’t think we’re going to get that in the short term,” said Percival Stanion, head of Asset Allocation at Baring Asset Management’s multi-asset group.
“You’d need to see Germany prepared to tolerate inflation of 3 to 4 percent and generate real growth of 3 percent or more to pull the rest of Europe out of the funk it’s in. And we just don’t see Germany wanting to become the consumer of last resort in Europe,” Stanion said.
Like de Vijlder, he was standing pat.
“We have very little exposure to anything in the euro zone, apart from a tactical position in Italian government bonds that we’ve been trimming.”
LAUDABLE BUT …
The fear among voters, politicians and investors alike was that December’s EU “fiscal pact” on strict budget limits was dangerously unbalanced and risked a chain reaction of ever-deeper cuts, exaggerated recession and job losses, collapsing tax revenue and ever-higher government deficits and debts.
To the extent that any offsetting “growth compact” breaks that circuit, then money managers reckon it has some potential to support euro equities, bonds and the currency — all three of which have started to trade in tandem on growth prospects.
Stabilising the euro economy is critical for corporate earnings but also government tax takes and ability to pay down debt.
But few if any funds plan to change strategy on the back of either the rhetorical shift or what appears to be on the summit table — a 10 billion euro EIB capital boost and budget deadline tweaks.
De Vijlder, who says his funds will remain underweight risk assets across the euro zone for the foreseeable future, described the evolving EU growth push as “laudable” even if the precise execution was pretty complex.
Abandoning deficit cutting would spook the markets completely, he said, and yet the leaders have to find a point at which austerity is not self-defeating.
“The pro-growth policy story – as it moves to the headlines – can be important for markets … It cannot be dismissed.”
For many asset managers, the prospect of a growth push is important in just offering some counterweight, beyond more ECB easing, to so many risks — a possible Greek euro exit, Ireland voting against the fiscal pact on May 31, a Paris/Berlin political split, or some fresh Spanish banking blowout.
“A shift in mindset towards a focus on getting Europe moving again rather than relentless cuts is exactly what the doctor should be ordering,” said John Bennett, director of European equities at Henderson Global Investors.
And some bond fund managers feel likewise.
“There may be a silver lining in France’s political change as the support grows for policies combining austerity and economic growth,” Cosimo Marasciulo, head of European Government Bonds and FX, Pioneer Investments told clients, adding he remained overweight Spanish and Italian government bonds.
“Risky assets may be under pressure in this environment, although we still recommend to buy them when markets become volatile, as searching for yields is the right thing to do.”
Yet many fear that any growth push, credible or not, may just be too far out on the horizon.
Ted Scott, global strategy director at F&C Investments, reckons the French and Greek elections simply hasten an increasingly black-or-white outcome for the bloc.
“I still believe the ultimate result of the crisis will be binary: a full fiscal union or partial fragmentation. The events at the weekend are likely to bring forward the day when one such ‘solution’ to the crisis is reached.”
(Editing by Ruth Pitchford)