Ein neues Paradigma für Europa?

A new paradigm for Europe?

Do the recent elections in Europe affect your allocation?

Not directly, but their results, especially in Greece, reveal the growing eurozone difficulties. The crisis is not nearing a settlement. Our pessimism arises from the authorities’ apparent inability to deal with the real issues. We believe the default risk to be high for some countries: Greece, Portugal, and perhaps Ireland. Recognising and managing this issue is feasible, but being slow to act will add to the cost. However, it is not just a sovereign debt problem; it is about the monetary union itself and how to manage the differences in economic situations and competitiveness. Is it reasonable, as Germany implicitly demands, to aim for the full and swift elimination of each country´s external deficit, when this is a zero-sum game as eurozone countries mostly trade with each other? Are we ready to ‘normalise’ the euro by federalising the eurozone economically? Is stringent austerity politically and socially acceptable? Politicians must tackle this if the crisis is to be resolved. Rather than a transition from which the eurozone could emerge transformed and strong, the road is still long and probably very bumpy. In this respect, it is a good thing that a debate has begun on the need to maintain growth. For now, we continue to recommend underweighting eurozone assets relative to peers. The near future is still high-risk, especially for Greece, which seems on the verge of an economic and political abyss.

The optimism of early 2012 is apparently fading, especially on the US economy. Could risky assets return to a downtrend?

Although growth is slow, we would avoid extreme judgments. We still see low growth in the US in 2012, possibly slowing in 2013 due to fiscal consolidation, but not a downturn. The eurozone is likely to stagnate rather than go into a strong recession. Developed countries enjoy cyclical support factors that make a deep recession unlikely: First, monetary policies are very accommodative and seem set to stay so. Second, the most cyclical sectors such as investment and construction are still at low levels, providing protection against a cyclical downturn. Lastly, emerging countries should keep growing substantially faster than developed economies. The situation requires a nuanced judgment as no clear trend is likely to emerge for some time; markets could be highly volatile within a broad band as it oscillates between phases of recovery hopes and fears of a relapse, depending on the latest data. This is also our analysis of the past quarters: after the fear of a double dip in H2 2011, markets began to hope for a cyclical acceleration in early 2012, and we are now in a new adjustment phase. We do not think this phase is over and remain tactically cautious. Even so, opportunistic position-taking on more risk could prove appropriate in a few months´ time if the correction continues.

What, then, are your general recommendations?

We continue to reduce our risk exposure. We are slightly underweight developed equities, with still a relative preference for emerging equities and a preference for US over European equities. We have taken slightly more profits on credit, which has performed well since the start of 2012. Government bonds still pose the same dilemma: they are generally too expensive given the level of long-term interest rates, but they benefit from low growth, risk aversion, no immediate inflation risk, and still accommodative monetary policies. We therefore remain tactically neutral. We neither recommend German or US state bonds due to valuations. Finally, we remain positive on gold and cautious on energy. Overall, we believe the situation still calls for a search for geographic alternatives, defensive strategies, diversification and decorrelation.

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Vincent TreuletHead of Strategy – BNPP AM