Against expectations, the Eurozone finance ministers failed to ratify the 5th tranche of the original €110bn bailout at the weekend.
The delay has created a further period of uncertainty in markets; however, Ted Scott, Director, Global Strategy at F&C, believes this is a shrewd tactic by the finance ministers as it puts the onus on Greece to take the difficult decisions if it is to get the money.
"The EU/IMF does not want to be seen as a soft touch and this will raise the stakes for Greece when it votes on the Medium Term Fiscal Plan (MTFP) next week. The size of the second aid package is now expected to be€110bn versus earlier forecasts of €60-65bn, covering Greece's finance needs to the end of 2014 and so removing it from the open markets until that date. Like the next tranche of the original bailout, the second aid package would be contingent on Greece accepting the austerity measures that are a quid pro quo for its receipt," Scott commented.
In Scott's view, the alternative proposal to rollover existing bond holdings on a voluntary basis would probably not constitute a credit event. He explains: "A joint press release from France and Germany agreed on a rollover in principle and in the meeting of the Eurozone finance ministers at the weekend it was given further support. The Eurozone is looking for a new package that includes 'informal and voluntary' arrangements with creditors to reduce the amount of new financing while averting default."
The next key vote will be on the austerity package itself that has attracted so much opposition within the parties and on the streets. In order to sell this within Greece, Scott believes it may be necessary to have less emphasis on austerity and more on structural reforms. For now, however, the situation concerning a possible default remains fluid and is likely to remain so for the next few weeks.
Scott concluded: "It was no surprise that Germany backed down in its efforts to involve private creditors that would have triggered a default. They will ultimately strive to do everything to save the euro project so further concessions would be likely, if necessary. What has changed in the last week is the volatile political situation in Greece itself. It is in its interests to be as difficult as possible to extract the best terms from the troika with regard to a second bailout. However, this game of brinkmanship is dangerous and is already unsettling markets and the banking system. The population is still ignorant of the consequences of a default and this is the real risk. If popular unrest forces the government to stand down, new elections would have to be called. This would mean the austerity measures for the second bailout would not be approved, triggering a possible default. For the moment this remains a less likely scenario than Greece finally accepting a second bailout on improved austerity terms."
New approach to GEMs
The Thames River Global Emerging Markets Absolute Return Fund, a UCITS III vehicle, launched yesterday, offering a new approach to investing in emerging equities.
Co-managers Kristof Bulkai and Hugo Rogers believe that now the emerging markets have matured and valuations have begun to converge with those in the developed world, the long-only strategy that has been the staple of GEM equity funds is no longer appropriate.
They anticipate that even if the outperformance of emerging markets starts to slow and markets trade sideways, a portfolio of actively managed longs and shorts can deliver strong absolute returns.
Bulkai and Rogers' investment strategy will be focused across seven sectors - Materials & Energy; Construction and Engineering; Consumer Staples; Pharmaceuticals & Healthcare; Banks, Financials & Real Estate; Consumer Discretionary; and Telecoms, Media and Technology. Within each sector core structural and cyclical ideas are identified based on the team's top-down and industry views; their geographic and sector selection forms a roadmap for their stock-picking.
Long positions will be focused on companies supplying desirable items to the emerging market middle-class consumer, such as colour televisions, cars, foreign holidays and education. The losers, where the team will have most of their short positions will be, for example, those businesses who in the past relied on cheap emerging market labour to manufacture products for the West. Bulkai and Rogers' highest conviction idea is currently within Telecoms, particularly mobile phones where consumers are shifting towards the new generation of products such as iPads and Smartphones.
"It pays to be patient", says Ulrich
Events in the developed world continue to impact the global market, heightening volatility and leading to vast differences in the performance of companies within in the UK equity space. Michael Ulrich, who manages the F&C UK Mid Cap Fund, took advantage of this to lock in gains from market winners whilst adding to underperformers that he believes still offer real potential.
Ulrich commented: "I recently trimmed positions in Croda International and Spectris - both of which are up over 90% year-to-date - in addition to Aegis, in line with a regular profit-taking discipline to maintain each of the 40 or so high conviction holdings in the fund at around 2.5%. This discipline also extends to positions that may be underperforming, as part of a constant reassessment on whether to top up amidst weakness."
Earlier this month Ulrich took the opportunity to add to select positions which had suffered some recent underperformance, such as Daily Mail and General Trust (DMGT).
"It's no secret that revenues in regional newspapers have been in decline for some years as fewer people buy them and classified advertising moves online. We are two years into new management at DMGT and there is evidence of change, particularly a shift away from newspapers to high-growth and high-return commercial information, data and events businesses. They have sold or closed loss-making or declining businesses such as Teletext, and have reduced debt and increased communication with investors. Additionally, Mail Online is the second most visited newspaper in the world (behind the New York Times but ahead of the Huffington Post). The attractive assets and improved management at DMGT is not yet recognised by the market, however we remain convinced that their strategy will reap rewards for shareholders," Ulrich commented.
Elsewhere, Ulrich also added to IG Group. Despite growing revenues from around £40m in 2003 to over £300m last year, the market has expressed concern about a recent slowing in the rate of growth in its more mature spread-betting markets, caused by a lack of volatility in financial markets.
Ulrich concluded: "Volatility in financial markets has been declining to pre-Lehman lows. IG's customers trade more frequently when volatility is high, however we believe that if we wait for that pick-up we will have missed the opportunity. In our view, periods of low volatility precede periods of high volatility and we believe it pays to be patient."
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