Invesco Perpetual’s Paul Causer is predicting risk assets will rally until at least the fourth quarter following the “marked turnaround” in sentiment in European markets early last week.
Causer, co-head of the group’s £12.9bn fixed income range, is confident economies will avoid a double-dip recession and believes improving signs such as the recent European stress tests and the watered-down Basel III regulations are all positive in building investor momentum.
While risk assets have suffered over the past few months on European sovereign debt concerns and fears over the stability of a number of banks, Causer says recent government and regulatory interventions are beginning to have a positive impact.
“From April to June we saw some pretty awful months. There was Greece, the other sovereign issues for the Piigs countries and the worries about the banks again,” Causer says.
“Greece was a real problem, but it has been taken out of the funding markets for three years.
“There was worry about contagion, but we saw a major step in the $1trn European stability facility. However, the markets were not ready.
“Some of the panic and concern shown by the markets forced the European governments to do things they would never have done otherwise.
“Now you have got the stress test and the relaxing of Basel III rules – everything seems to be coming together.
“Risk appetite is being restored and there is a changing market perception about
just how weak Europe is going to be.”
While many observers viewed the European bank stress tests as a ‘non-event’, Causer applauds the initiative.
“The stress tests facilitated a huge amount of bank disclosure. Across the whole of Europe we know a lot more about what banks are holding, with the exception of Germany,” he says.
“People who say the stress tests were a non-event are completely wrong. The fact they did it and provided information was an event.
“The proof of it is what is happening to European bank stocks. If it was not an event, why are all these banks rallying like crazy?”
Causer and co-manager Paul Read are continuing to build exposure to risk assets in anticipation of further gains but the duo believe investors should be prepared for market volatility.
“I would not want to get too carried away, because when you take away the banking problems and European government funding problems and push them to one side, you are left with the macro picture,” Causer adds.
The legacy of what we
went through will be a very choppy and volatile macro
environment.
The industrialised world is generally going to see low growth, which will be split by periods of real optimism and also probably extreme pessimism. This could be when we start to talk about really low levels of growth again or even skirt with a mild recession.
“But I do not expect to see a double-dip unless there is a shock.”
