BNY Mellon IM News & Views: Alcentra and Newton on Article 50 and Eurozone
BNY Mellon Investment Management (IM) | News & Views
Political uncertainty triggered by the UK’s decision to leave the European Union (EU) and fears over a raft of forthcoming national elections in Europe have led some commentators to predict the imminent demise of the eurozone.
With Greece also currently locked in talks with EU and IMF officials over ways to ease its ongoing debt crisis, market uncertainty remains a key theme among many European investors.
Paul Hatfield, Global Chief Investment Officer at Alcentra
“Although the triggering of Article 50 shouldn’t come as a surprise to anyone, we believe it will still send a slight shockwave to the market as people focus on the reality of the task ahead and the implications of exiting the EU. Sterling is likely to drop another level. This will have implications for Sterling loans and bonds which could trade off and we expect to see less issuance of these as things play out.
“Year to date, Sterling high yield bonds have performed well outperforming Euro and Dollar high yield returns, so it wouldn’t be surprising to see a pullback from investors after Theresa May makes the announcement. As has been the case for some time now, there is plenty of cash in the wings with buyers waiting to pick up what they see as bargains on any dips, so I don’t see a cataclysmic fall in markets, particularly as headline economic news has been fairly robust of late.
“With weaker Sterling, inflationary pressures are likely to continue to build and if the UK consumer continues to withdraw from retail spending, we may see some pain in that sector. Against that, tourist spending has been very strong and with a lower pound, is likely to stay that way.”
Jon Day, Fixed Income Portfolio Manager at Newton Investment Management
“While there are some genuine investor concerns on Europe, we do see signs the regional economy is picking up. Ironically, without some of the current background political uncertainty, most investors would probably be quite comfortable with the latest European economic outlook.
“Despite some fairly gloomy predictions it could be argued that, with the exception of bond markets, a lot of the European assets currently being affected by political risk actually look quite cheap. And while Europe remains politically volatile, volatility itself can also provide opportunities – because the underlying risks which drive it often turn out to be less extreme than markets initially fear.
“In early March the euro rose 0.7%, hitting a weekly high of US$1.0615, while the German Bund reached its highest level since February on news European Central Bank (ECB) President Mario Draghi had declared victory on deflation. The ECB no longer had a “sense of urgency” on doing more to bolster eurozone growth and inflation via its quantitative easing programme. Against this improving economic backdrop, the political risk inherent in upcoming elections in France and Germany is also less stark than in the 2016 UK referendum and the US election, though it is important to caution that further political upset cannot be entirely ruled out.
“While upsets can happen I’m more relaxed about political risk in 2017 than last year because the two major political events of 2016 – the Brexit vote and the Trump election in the US – were very much binary 50:50 decisions and, as we saw in the Dutch election, the European elections are much less clear cut. Given improving economic data, the euro looks safe for the foreseeable future but it is what happens in the next recession that is likely to be decisive, given the underlying structural issues some eurozone members face. Recent history suggests we will probably see a recession in Europe at some point within the next 10 years and without real economic improvement the eurozone could face that from a very weak position, particularly if unemployment were to rise substantially.”
Alcentra and Newton Investment Management are part of BNY Mellon
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