So what was it that came out of the meeting to assuage markets at least that there is a concrete plan of action in place, or one coming soon? And what does it all mean for investors?
- Europe’s largest banks will have to set aside north of €100bn in new capital which could put passing their stress tests in doubt.
- The European Financial Stability Facility (EFSF) will not be turned into a bank and will therefore not be able to borrow from the IMF;
- Holders of Greek government debt will have to take a haircut of as much as 50% to help reduce the country’s national debt levels;
- Another meeting will be held on 26 October – this Wednesday – to hopefully get closer to a more comprehensive plan of action to resolve Europe’s debt levels.
Raising the level of the haircut for bond holders should help Greece to achieve a sustainable debt-to-GDP ratio and reduce Greece’s contribution to the European sovereign crisis. Banks and the wider financials sector will bear the brunt of any such sovereign debt restructure and make them even less appealing to investors across the asset classes.
There are still plenty of equity and bond investors who are quick to point out the growth opportunities that current valuations are providing as well as their increased attraction as eurozone and wider European political leaders do put a plan together.
The cost-cutting that European companies went through in the immediate aftermath of 2007 and Lehman Brothers’ collapse in 2008 means that they are in a relatively strong position now by comparison, with low inventory levels and great efficiency thanks to more streamlined staffing numbers.
The biggest threats remain macro and political and, while they are incredibly significant threats, asset allocators should be able to work around them as more facts become known about its debt solution plan. Individual companies are starting to report third-quarter results and as these are analysed, a picture should emerge of those sectors and companies best placed to help investors steer their way through the European malaise.
Despite the continued political and economic uncertainty, long-term investors should be able to benefit from an allocation to Europe – stock-picking fund managers should win out – but Europe is not going to be a great short-term play for a good while yet, though shorting Europe could be.
