Investment professionals have mixed views on the latest moves by the European Central Bank’s Mario Draghi to ensure the survival of the euro.
At the end of July, Draghi announced that the ECB would do whatever it takes to ensure the survival of the euro and followed this with a statement that the ECB would provide support to distressed sovereigns if conditionality was met.
Commenting on these developments, JP Morgan Asset Management international fixed income portfolio manager, Iain Stealey, said: “Since then we have received radio silence from Europe’s leaders, and for the most part the market has given them the benefit of the doubt. However, as we have seen numerous times during this peripheral debt crisis, the market will only be patient for so long, and as investors and politicians return from their summer vacations they are going to want to see action. Talk is cheap and the need for Spain and Italy to ask for EFSF/ESM intervention for the ECB to deploy its balance sheet remains an issue that could well lead to increased financial market stress in the coming weeks.”
But according to Brewin Dolphin, the ECB’s stance is extremely encouraging. Head of portfolio strategy, Guy Foster, said: “Even long-time Eurozone sceptics must accept that a huge policy shift is underway, and that Europe is making an uncharacteristic rendezvous with economic pragmatism.” He said that while the European Stability Mechanism (ESM) has limited funds, the ECB has potentially bottomless pockets, like the UK’s Bank of England or or the US Federal Reserve. “When a body with unlimited buying potential announces a yield target, that prophecy becomes self-fulfilling. Very few participants would be sellers at a yield of 6.4% if the ECB is a buyer at 6.5%. Likewise who would not be a buyer at 6.7% yield on the same basis?” Foster said.
However, SEI head of European institutional solutions, Ashish Kapur, has warned that interest rates around the world are at their lowest ever levels, with Germany recently issuing two-year bonds with a zero coupon for the first time ever. Kapur said: “Economic growth is dismal and the deleveraging process and quantitative easing measures undertaken by governments around the world has continued to suppress any prospect of a surge in interest rates in the short term.” Kapur added that more quantitative easing could put downward pressure on Gilts, and pension schemes need to be positioned to exploit current and future interest rate movements.