However, as we near the end of the first quarter of 2012, data may be pointing to yet more market turbulence.
The FTSEurofirst 300 index of top European shares lost 2.5 per cent in the week of March 16, its biggest weekly drop since mid-December, as a raft of weaker-than-expected data from China, the US and Europe prompted investors to take profit before incurring potential losses.
Didier Saint-Georges, member of the investment committee at Carmignac Gestion, says that this is because the ECB’s massive liquidity injections may have helped avert the threat of a European Lehman-style crisis, but has done little to improve the economic outlook for Europe.
“By tarring Italy, Spain and Ireland with the same brush as Greece, which deserves to be accused of exceptionally wasteful government spending, the European Commission and the IMF continue to force drastic austerity measures on these countries. What Spain, Ireland and Italy need is greater competitiveness, more labour market flexibility and higher growth, and not drastic spending cuts,” he says.
“At the same time, the banking sector is still being very overcautious – reserves deposited with the ECB as a safety net have increased by 50 per cent in just one year – while the euro remains overvalued. So while the ECB did manage to prevent the eurozone’s sudden demise, the prospect of a lengthy recession looms large and the self-destructive fiscal fast that this recovering region is inflicting upon itself is only making matters worse.”
Investors tread with caution
According to Jeremy Whitley, head of UK and European equities at Aberdeen, investors would be wise to remain cautious on the region in spite of the strong market rally that has accompanied the start of 2012.
“Last year we thought policymakers would face challenges in unwinding their interventions in what were fragile economies demonstrating some signs of recovery. In fact they ended the year having substantially deepened their involvement,” he says.
“As a result, the global economy remains very much on economic life support, being kept alive with ever larger injections of liquidity and cheap money. While this has most likely mitigated the worst-case scenarios of an implosion in the European financial sector and a disorderly break-up of the euro, it still leaves behind a global economy short on growth and long on structural challenges. We suspect a sustained period of austerity is upon us, which is sure to severely test political will amid the need for deep structural reform and fragile economic recovery.”