06.12.2012
By Terry Flanagan

European Investors Mull Return To Equities

As Europe’s equity markets continue to take a battering from the eurozone sovereign debt crisis, some investors now believe that the time may soon be right to jump straight back into the shunned asset class.

With markets gearing up for the possibility of more uncertainty as Greece’s second general election approaches this Sunday that could determine whether or not the country remains in the eurozone, as well as the dramatic bailout of Spain’s struggling banking sector to the tune of €100bn earlier this week that caused markets to slide, it seems to be a far from ideal time to be considering a big return into equities.

One view of the current crisis, from a London-based investment company, predicts that the anti-austerity trend will continue across Europe, causing a rapid implosion of the euro, as voters take control and start on a new economic path—causing some eurozone countries to default.

“Eurozone default is [a] great turning point,” said Jonathan Compton, managing director of Bedlam Asset Management. “As in previous crises, investors shun the asset class—equities—about to offer exceptional returns.

“An extreme example is Greece. The entire stock market is now capitalized at $21bn, the monopoly stock exchange itself at $180m—respectively less than 4% of the value and 0.1% of a single day’s turnover in Apple.

“Italian opportunities are greater. It is probably premature to place bets on the PIIGS [Portugal, Italy, Ireland, Greece and Spain] or wider equities, if only because of the European Union’s amazing record of dither and delay. Yet as decision making has already passed from the European Commission to voters—thus national politicians whose priority is re-election—any further weakness will be brief, hardly visible on any longer term chart.

“The result will be an enormous boost to equity market valuations as economic reform and corporate renaissance are allowed to happen with the dead hands of government incompetence and inertia temporarily turned off.”

However, Mark Parsonson, executive director of London-based fund of hedge funds manager Liongate Capital Management, issued a note of caution on the eurozone crisis.

“Things could fall apart very quickly if the outcome of the Greek election is an adverse one,” Parsonson told Markets Media. “As an investor, you want to be pretty cautious right now. It’s a binary outcome”

And while equities may hold some appeal, other asset classes and trading strategies may offer better returns in the long run, said Parsonson.

“Hedge funds are not just long-only investors,” he said. “We are able to take a long and short view against the entire range of assets that exist out there.

“That said, the fundamentals in equities appear to be stronger than investment grade high-quality bonds—certainly when you look at the historical valuations at these levels, particularly at their relative valuations.

“There is a strong case for long-only investors to go into equities because if they stay in core bonds or investment-grade bonds they are virtually guaranteed a negative real rate of return over the long term so they will lose purchasing power. For long-only investors who have to make that decision, maybe that’s a strong one. For hedge funds who have the ability to look across the spectrum—they continue to see great opportunities in a lot of asset classes, not just equities.

“There is good value in equity where macro risks have depressed in certain parts of Europe but the tail risk is high. There are other parts of the equity markets, gold equities for example, where the valuation opportunity is tremendous. Particularly if you believe more central bank intervention is coming down the road.

“That said, there are great opportunities to short bonds given low yields so, as a hedge fund, I know that bonds are overvalued fundamentally and I have the opportunity to short them rather than make a relative decision between fixed income and equity.”

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