Ongoing concerns in the eurozone are forcing investors into buying “practically worthless” safe haven assets, managers believe.
PSigma Investment Management chief investment officer Thomas Becket said current market conditions are among the “most challenging” experienced in the last few years.
Europe’s woes have barely started to be addressed and political uncertainty in Greece and the urgency for help in Spain illustrate quite how serious the situation has once again become, Becket said.
He added: “Panic and pain is forcing some investors into buying practically worthless ‘safe haven’ assets and there is fear and loathing directed towards any investment that is perceived as being risky. Selling of equities and buying of ‘quality’ government bonds has become almost indiscriminate at times, as yet another bright start to the year for financial markets has given way to a miserable summer.
“For some time, many commentators have argued that the European creditor countries will allow the debtor countries to go to the brink, in order to ensure that lessons are learned. In recent weeks, it seems the brink has been reached. The time for action in Europe is now.”
This comes after European policymakers agreed a €100bn bailout of Spanish banks, after which the yield on 10-year Spanish government debt exceeded 7%.
F&C global strategy director Ted Scott described the move as “yet another policy announcement that does little more than buy time and remove short-term systemic risk”.
He added: “The news is a long way from a full banking union that would have been a significant step towards closer fiscal union and, crucially, gone a long way to cutting the umbilical cord that binds the sovereigns to the banks.”
Merrill Lynch Wealth Management chief investment officer for Europe, Middle East and Africa Bill O’Neill agreed it was only a short-term solution.
He said: “Spain has, to date, not convinced markets around the separation of the sovereign and banking sectors and the success of the programme in this regard is essential.”
O’Neill added markets could drift higher as investors are extremely underweight riskier eurozone assets (peripheral equities and sovereign debt). “We are not minded, at present, to increase risk within portfolios as too often an initial bounce has waned and disappointment set in.”
Meanwhile, Aviva Investors senior credit analyst Nancy Utterback said investors should prepare for several mini waves of investment grade corporate bond issuance.
She added: “In volatile times, companies try to spot ‘windows of opportunity’ rather than issuing debt at a regular pace.”
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