Markets can finally relax after Greek election result
JP Morgan’s Nick Gartside says the formation of a pro-bailout coalition should give eurozone policy makers enough time to come up with a lasting solution.
The result of the Greek election has renewed optimism that the authorities have finally got on top of the crisis, says Nick Gartside (pictured)
, international chief investment officer for fixed income at JP Morgan Asset Management.
It is now likely a pro-bailout coalition will be formed and that Greece will remain in the euro for now. Gartside says this is excellent news for investors as only political issues now stand in the way of a lasting solution to the crisis.
"If the European Stability Mechanism (the eurozone’s bailout fund) was used to recapitalise banks directly, rather than to lend to governments to enable them to recapitalise their own banks, it would be extremely powerful and would probably convince investors that the crisis was being tackled," he said.
"Greece is quickly running out of cash, tax receipts have fallen and a significant proportion of the population continues to oppose the terms of the bailout. But with a pro-bailout government in place, these issues can be managed within the context of the eurozone," he added.
Gartside is still not keen on government bonds in the European periphery, however, and he says that Spain is a larger source of concern than Greece due to three key weaknesses: its public finances, the fragility of its banking system and sovereign debt stress.
"For bond investors, we expect yields on core government bond markets to remain low for a significant period."
"The highest-conviction opportunities we are identifying at the moment are in credit, particularly investment grade credit. Corporate fundamentals are strong and investors are being well compensated for risk by very attractive yield spreads."
JP Morgan is taking a moderately positive view on the potential for equity markets this year, saying that valuations – while not cheap – are well below average.
Dan Morris, global strategist at the firm, says that despite the positive effect of the election results in Greece it is still too early to go in to peripheral European markets, which will remain the case until certainty on the countries’ funding is achieved.
However, he thinks there are still some geographical areas with decent potential for earnings growth, which investors should be looking at.
"Germany has been one of the better markets so far in 2012 and we are still relatively bullish."
"Despite the market’s relative outperformance, valuations relative to other countries in the eurozone remain below average, as German corporate earnings have kept rising even as regional uncertainty has pushed prices down."
"In contrast with other countries in Europe, earnings forecasts in Germany are still rising," Morris said.
The most attractive areas remain those removed from the eurozone debt crisis although, as in Europe, political factors are crucial.
"We expect the US to continue to outperform other developed markets,"
"Fiscal and monetary policy is, broadly speaking, more stimulative in the US, at least for the time being, and the greater flexibility of the US economy also remains a positive factor, providing scope for companies to boost productivity and increase earnings per share."
"Emerging markets have suffered this year as a result of widespread risk aversion and weaker-than-expected economic growth, not only in China but also in Brazil and India."
"Following this period of underperformance, the potential returns for emerging markets appear reasonably good over the remainder of the year, although much depends on the policy response."
"We expect Chinese growth to rebound over the course of the year, benefiting global equities and commodity exporters, but the policy outlook is less clear for Brazil and India," he finished.