Headline-grabbers in the real world are not necessarily so in the financial world, and while Alexis Sipras and Co. are captivating the global media, the surprising lack of European market volatility suggests that investors’ attention is being drawn elsewhere.
This is how it should be, says Edwards, manager of the Invesco Perpetual Global Bond Fund, with the interest rate rise story representing a more pertinent distraction.
“We can move on from Greece and focus on the so-called ‘lift-off’ – the timing of the US and UK interest rate hikes,” he said.
“There has been a market impact, but given the gravity of the situation in Greece it has been less than we expected, and certainly less than what we could have expected three or four years ago.”
Edwards cited both European Central Bank policy and the ongoing recovery in the eurozone as providing a more stable economic picture and something of a buffer against tremors stemming from the threat of a Greek exit from the euro.
“Cross-border ownership of Greek assets is less than it was three or four years ago,” he expanded. “The ECB has put a number of policies in place to ease the transition mechanism of monetary policy and is also buying European government bonds, including those of the southern periphery.
“But, most importantly, a lot of the eurozone countries – Spain, Portugal, Italy and Ireland – are in a much better position than they were three or four years ago in terms of structural reforms and growth.”
However, while Edwards is relatively sanguine, he still expects a significant amount of volatility and is bracing his portfolio for any that might materialise as we move on through the summer.
“Greece has been ring-fenced to a degree,” he said. “But it is still early days and there will be a lot of volatility over the course of the summer.
“Impact has been fairly minimal. However, currency strategy is quite integral to the Global fund’s profile, so I have taken down my euro exposure on the pound, dollar and Japanese yen.
“My duration exposure has gone up recently in order to benefit from any negative Greek moves i.e. any safe haven-related flows. That said, core bonds have risen quite significantly since April, so in a sense it is also a tactical position.”
The rate also rises
So what can investors expect from the interest rate side of things?
“Growth is picking up in the US and labour markets are continuing to tighten,” said Edwards. “In a lot of developed markets unemployment numbers are coming down and wages are starting to pick up, so we are getting closer. I think that a US interest rise could plausibly occur as soon as September.
“If rates rise gradually the market impact should be fairly limited. That said, if wage data starts to pick up or inflation surprises on the upside, it could cause a bit of a shock.”
