Investors take profits on fears EU-driven rally will not last

EU politicians’ long-awaited agreement on eurozone crisis lifts markets worldwide but investors move to cash in view equity rally may not be sustainable

Global markets surged last week as politicians agreed a long awaited eurozone rescue plan, but fund managers are not convinced the rally is sustainable and some are taking profits and moving to cash.

The French and German leading indices rose almost 6% on Thursday as EU leaders set out their three-pronged plan, while the FTSE 100 saw a 3% jump. US shares climbed around 3.5%, also lifted by improved Q3 GDP figures, and the S&P 500 is now on track to deliver its largest monthly gain since 1974.

Bank shares including Crédit Agricole, BNP Paribas, and Barclays, which were hit hard in August’s sell-off, rocketed by as much as 20%.

The euro surged 2.4% against the dollar, while Wall Street’s ‘fear index’, the VIX, fell 15% to its lowest level in three months.

The sovereign debt crisis was triggered in 2009 when incoming premier George Papandreou shocked markets by revealing the true extent of Greece’s budget deficit, which was twice the previously published figure.

Since then, EU leaders have held 14 meetings in a bid to solve the crisis.
Managers said although markets had welcomed the rescue plan, now is a good time to revisit portfolios and lock in gains.

Barry Norris, manager, Argonaut European funds
There is initial euphoria in the markets but I think the market is likely to view the details with a degree of scepticism. Clearly European equities are an unloved asset class and this plan is not an all-clear for the future. I think in general what we are seeing reflected in valuations is not factoring in a lot of good news.

Corporates outside of the banks are doing well, so I think the rally could continue for a few weeks but beyond that they will still be pretty volatile.

I made changes to the funds over the last few weeks to reflect this plan is largely what we expected to be announced. Some stocks have been fairly marked and some unfairly - we are trying to find the latter.

Jim Rogers
The relief rally might last for a while, but whether for a few days or weeks I do not know. There has been a major overhang, and now some pressure will be released, but the problem will come back in time because the world still has not dealt with the massive amounts of debt in the West.

Jan Luthman, co-manager, Walker Crips UK equity fund range
Greece is to be forgiven a large chunk of its debt but where does it stop? I think it will have a knock-on effect on the other peripheral states – if Greece can miss its payments I do not see how policymakers will not allow other states to do too. This introduces risk to the markets that is not yet being taken on board.

The deal is a stepping stone on a long and difficult road. It is as much as can be expected at this stage and it looks like it is what the markets were expecting. If there was anything much more in the deal they would have been up a lot more. I suspect an element of the market rise is hedge funds closing short positions, and the initial reaction was perhaps larger than the underlying fundamentals justify, so there will be a degree of consolidation in the coming days. 

We have an 8% cash position on the £200m Equity Income fund and, although we are not going to rush back in, we will be looking to reinvest.

Paul Wild, manager, JOHCM Continental European fund
The results from the summit certainly offer some reassurance. In particular, the comments on bank funding guarantees and euro area governance reforms are new and welcome developments. Meanwhile, all eyes are on the credit markets to see if sovereign solvency concerns for the likes of Italy abate. In the near term, a floor has been put under the share prices of banks and insurers.