Europe’s ‘Lehman moment’ has been averted but starving the eurozone of much-needed growth through the enforcement of draconian austerity measures is no long-term solution, according to Carmignac’s Didier Saint-Georges.
In its latest monthly investor note, the firm’s spokesperson and investment committee member said:
‘The ECB has avoided the eurozone’s sudden death but the fasting period that this convalescing region is imposing on itself is self-destructive.’
Radical austerity measures imposed by the European Commission and the IMF on peripheral countries Spain, Ireland, Italy and Greece are crippling them and any chance of boosting their growth levels.
‘Today these countries need to urgently increase their competitiveness, their labour flexibility and their growth and not impose violent reductions on their spending.’
Despite the eurozone situation, the global outlook has improved since last year, says Saint-Georges. It has been bolstered by the ECB’s move to improve banks’ access to liquidity through the LTRO process, liquidity injections by both the Bank of England and Japan and a loosening of emerging markets monetary policy.
His firm has even been on the offensive since the start of year, raising its exposure levels in most of its funds close to their maximum.
But investors must remain lucid to the risks surrounding them and not let themselves be carried away by this increased liquidity, especially in Europe, says Saint-Georges.
‘The ECB initiative has successfully treated the risk of a European “Lehman moment”. The banking sector now has the majority of its refinancing needs secured until 2014. But nevertheless, important risks still remain.’
‘First of all, the risks surrounding the implementation of the second Greece bailout should not to be underestimated.'
‘And, liquidity injected in the banking sector has not yet made its way into the real economy: the contraction of private credit in the eurozone increases the risk of recession, each month rendering more misleading the public debt reduction forecasts.’
Oil price warning
Saint-Georges also warned of the threat unrest in the Middle East could have on the oil price, as it could affect recent improvements in the global economy.
‘Finally, the risk the oil price - which has risen 15% in two months – will be impacted by an external shock, caused by the worsening of geopolitical relations due the current position of the Iranian government, is a concrete threat to developed countries consumer levels and the pace of monetary loosening in the emerging markets.’
Carmignac in a nutshell
The firm’s move to increase its funds exposure levels close to their upper limits may seem a bold move but, says Saint-Georges, the portfolios remain ‘clear-sighted’ and balanced.
‘We have a preference for US and European countries that have little exposure to macroeconomic issues; for the domestic consumer sector in the emerging markets; for gold mines, an underweight in European banks; and a strong currency diversification with a bias towards the dollar.’