European authorities could still “find a mechanism” to allow Greece to leave the euro, in spite of panic surrounding the single currency having subsided during 2012, according to Smith & Williamson (S&W).
Chris Lynas, S&W’s head of fixed income, is continuing to hold a bearish view on the euro. He removed all euro exposure from his £607.9m Short Dated Corporate Bond fund at the end of 2011 in order to avoid problems with hedging if Greece was allowed to exit the euro.
The manager said: “I wouldn’t be surprised if a mechanism is found at some point for Greece to leave the euro quietly. The danger if they do leave is that others could then follow.”
Mr Lynas said that other struggling eurozone members may be encouraged to reconsider their membership of the single currency if Greece started to benefit from a devalued drachma.
“If Greece left and the drachma halved in value, we would be going on holiday there,” he added.
Robin Marshall, fixed income economist and adviser on the £22.5m S&W Global Government Bond fund, has forecast that in 10 years, although the euro should still exist, it was likely to be centred around the stronger northern European countries which are more willing and able to align their fiscal policies with Germany.
Leading European equity markets have rallied in the past six months following promises of action from European officials to stave of the collapse of the euro but earlier this month the European Commission’s economic chief Olli Rehn warned that the continent could not afford any “unforgivable” lapse into complacency.
Meanwhile, Mr Lynas said he was preparing to shift out of index-linked bonds and into conventional bonds in the Global Government Bond fund in anticipation of the current market rally “running out of steam”.
The manager said he would look to conventional bonds issued by countries such as Norway, Switzerland and Singapore as they were more solvent and retained the ability to implement quantitative easing if necessary.
From its launch in May 2012 to January 14 the Global Government Bond fund gained 1.2 per cent, ranking it in the bottom quartile of the IMA Global Bonds sector but outperformed its benchmark, the FTSE British Government All Stocks index, which lost 0.4 per cent.