Sponsored Links

Political risk is taking center stage for global money managers as they consider their stance on Europe, offsetting the potentially economy-boosting effects of a new quantitative easing program for the eurozone.

While some money managers say they are overweight Europe, thanks to an encouraging growth story, they have had to retain some caution because of uncertainty caused by politics.

Part of the threat is the rise of nationalistic political parties, as evidenced in the triumph of Greece’s Syriza party, the Coalition of the Radical Left, in late January. With the rise of the right-wing U.K. Independence Party and its potential place in that country’s politics come the May general election, plus the popularity of left-wing Podemos in Spain which is due an election at the end of the year that concern is very real.

This is what could break the eurozone, said Serge Pizem, Paris-based global head of multiasset at AXA Investment Managers. It will be a political decision, not an economic shock but a major country that says I’m out.’

Money managers have an eye on the nationalistic Syriza, known as an anti-austerity party, and its efforts to renegotiate Greece’s country’s e240 billion ($274.1 billion) bailout. The country’s new finance minister, Yanis Varoufakis, has visited European economic powerhouses, including London, Paris and Rome.

The political and economical uncertainty that money managers are feeling was echoed by George Osborne, U.K. chancellor of the exchequer. Following his meeting with Mr. Varoufakis in London, Mr. Osborne said: It is clear that this standoff between Greece and the eurozone is the greatest risk to the global economy.

The increased political risk comes at what should be the time for Europe to step into the spotlight. Global money managers highlighted in interviews positive earnings growth for the eurozone, the continued weakening of the euro and the oil price collapse as boosts for the Europe story.

But the biggest positive came in the shape of an announcement by Mario Draghi, president of the European Central Bank, who said Jan. 22 that the ECB would be implementing a e60 billion per month bond-buying program, starting in March. He said this will run until September 2016, or until inflation is brought up to target for the eurozone, around 2%.

Market reaction

Markets were surprised by the extent and open-endedness of the program, but the announcement had the desired effect; European equities rallied, bond yields fell and the euro further depreciated vs. the dollar.

The MSCI Europe index has gained 8.3% in 2015 through Feb. 4, and rallied 3.5% from the date of the ECB’s announcement. That compares with a 7.6% return for 2014 as a whole. The euro, meanwhile, depreciated 5.6% vs. the U.S. dollar from Dec. 31 through Feb. 4, and depreciated 1.6% after the ECB’s announcement through Feb. 4.

Wouter Sturkenboom, investment strategist at Russell Investments in London, said the $275.1 billion money manager has upgraded Europe GDP growth expectations, as indicators of Europe (are) starting to turn around, (and) are looking better.

A big plus for the eurozone was the oil price collapse. The drop in the oil price is a major positive for eurozone growth (as Europe is an importer rather than an exporter) that will filter through, he said. He said Russell has upgraded its expectations for growth in Europe, and has added to its overweight on the Continent.

And then there was Mr. Draghi and the demonstration of his July 2012 promise that he was willing to do whatever it takes to protect the eurozone from collapse. The growth story is the major (tailwind), but on top of that you have the icing on the cake which is quite a thick layer in the shape of QE. It will be a major support for eurozone financial assets, said Mr. Sturkenboom.

But while the extent of the European Central Bank’s quantitative easing program might have had the desired effect on the markets, with sentiment up and the euro weakening further, money managers cannot get political risk out of their heads. On top of everything else, there’s the ongoing situation in Russia.

I still worry about Russia, largely because of oil, said Neil Dwane, London-based European equities chief investment officer at Allianz Global Investors. It is a gray swan Russia is suffering badly, with sanctions still tightening.

Greece, Russia hurt Europe

If Greece and Russia were not in play, I would say that Europe is indeed the place to be, said Lukas Daalder, chief investment officer at Robeco Group NV in Rotterdam, Netherlands. Rather, the e246 billion money manager is neutral Europe, with its only comfortable overweight allocation to Japan, he said.

Mr. Daalder said Robeco had been broadly long risk in terms of allocations to equities and high-yield bonds throughout 2014 and for most of 2013. But we have decided to scale that level back in 2015, and we have decreased our risk appetite.

ING Investment Management Holdings NV upgraded Europe to overweight from neutral immediately following the ECB announcement, said Patrick Moonen, senior strategist within ING IM’s multiasset boutique in The Hague, Netherlands. We downgraded the U.S. from neutral to underweight. Depending on what happens with regards to Greece and currencies, we might increase the gap between Europe and the U.S. more in favor of Europe.

Mr. Pizem said AXA Investment Managers is overweight the eurozone, but would be even more overweight without the Greece situation, and if structural reforms in France and Italy in particular became a reality. In that case, said Mr. Pizem, the manager would move to underweight from a neutral position on the U.S. to invest more money in the eurozone.

But one thing that political uncertainty does create is volatility, which is a good opportunity for stock pickers.

Any downward volatility from Greece, which could very well happen, will be considered a buying opportunity from our position, said Mr. Sturkenboom. In the end, what matters is growth profile, which Greece has little weighting on, and corporate profit. I think the eurozone is gearing up for double-digit earnings growth; if Greece puts a little wrench in the wheels that is probably an excellent buying opportunity.

However, Russia is more difficult. It has more pull than Greece economically and politically. Russia is a more nuanced story that we would have to analyze a little more closely before we made a call. n

This article originally appeared in the February 9, 2015 print issue as, Political risk threatening to offset potential European growth.