EuropeanMay 13 2013

Major issues still have to be tackled: SLI’s Milligan

Search sponsored by

European managers have warned there is still a lot of work to be done to rescue the eurozone as the region marks the three-year anniversary since the creation of the European Financial Stability Facility (EFSF).

The bailout facility succeeded in its mission to safeguard against a country’s exit from the single-currency, but failed to inspire confidence in European markets, which remained poor until Mario Draghi took action in the summer of 2012.

Andrew Milligan, head of global strategy at Standard Life Investments, said the bailout process had “seriously undermined investor confidence in many respects” and most initiatives were “too little, too late in the day”.

“There is considerable uncertainty about what future support packages might look like as no uniform approach has so far been agreed,” he said.

“Some of the recent bailouts, such as Cyprus, have left questions floating in the air, such as the threat to depositor accounts.

“Major issues still have to be tackled, probably after the German election, such as how to break the linkage between sovereign and bank debt, in other words what does European Banking Union really mean?”

Andreas Zoellinger, co-manager of the BlackRock Continental European Income fund, said the establishment of the EFSF “was a step in the right direction”, but it wasn’t until Mario Draghi’s promise to do “whatever it takes” to keep the eurozone intact that confidence was restored.

But Mr Zoellinger said the eurozone “will still remain a low growth area for the foreseeable future”, which has been highlighted by recent purchasing managers’ index (PMI) data which suggests that even Germany’s economy is contracting.

European stockmarkets had lagged their developed market peers since the financial crisis even after the EFSF was set up but Mr Draghi’s actions caused a significant rally in European equities in the second half of last year.

However, Mr Zoellinger said valuations were still attractive in the region, just not “outright cheap” as they were before the rally.

“Investors are still mainly holding underweight positions in European equities but more and more they are appreciating that it is investable again and there are good reasons why those underweight positions should be reduced,” he said.

Bailouts numbers

€440bn - The original size of the EFSF agreed by the eurozone member states in May 2010

€780bn - The size of the enlarged bailout fund agreed in October 2011, when a stockmarket crash had raised fears of a eurozone collapse

65% - The percentage of the enlarged bailout fund’s guaranteed commitments that come from the biggest three economies; Germany, France and Italy

€486 - The amount of money that has been spent, or is committed to be spent, on bailouts so far