While fears of Greece defaulting on its debt continue to mount – to the extent that on 2 June the chairman of Holland’s court of audit warned Dutch taxpayers that they stand to lose up to €12bn in the fall-out – across the Atlantic there is another issue brewing that could steal the thunder.
Gumpel, manager of Brooks Macdonald’s Defensive Capital Fund, believes that while Greece is occupying the headlines, it is only one of a series of influential factors in the markets now.
“The kicking of the can has gone on for long enough,” he said. “Europe has hung Greece out to dry, and now we are approaching a key decision time for the Greeks”.
“It is likely that there will be extra volatility surrounding a potential default, but some of the other factors in play in markets make us worry more.”
Gumpel warned that investors need to retain focus on the US to see if sluggish first quarter US economic figures turn out to be a blip as this has much wider-ranging ramifications.
“We are coming up to a key fork in the road” he said. “If the US economy Q2 figures turn out to be strong we will see an interest rate rise in the next three or four months, and a Greek default could become very much a secondary issue as markets reprice rapidly.
“Alternatively If the Q2 figures are weak then the US is on the brink of or in recession, the dollar would weaken against the euro and kill off the nascent European recovery. We are at a critical stage of seeing whether the European economy is moving out of permafrost, and Draghi may end up having to front-load the QE policy – the one thing he does not want is a strengthening euro.”
Getting a grip in a currency swing
Euro weakness is widely viewed as the proponent of a long-term European recovery, with the MSCI Europe ex UK index having risen 6% in 2015.
However, in the face of such an uncertain outlook, Franz Weis, manager of Comgest Growth Europe’s Greater European Opportunities Fund, advised investors to maintain an active approach.
“Currency swings are, by their nature, linked to macro-economic factors and are therefore difficult to predict in an accurate and timely fashion,” he explained. “This backdrop might suit some short-term punters, but it is no sound base for a long-term stock picking approach.
“Investors shouldn’t rely on factors such as currency or macro trends to drive earnings. For the long-term investor, a passive investment into the European market may disappoint as the market as a whole is arguably too dependent on a continued euro weakness to generate further growth.”
