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Gleeson: We’re on the verge of another euro crisis

The head of FE Research says political will is the only thing keeping the eurozone together and that social unrest will cause popular support for the project to dry up over the coming months.

Joshua Ausden

By Joshua Ausden, Editor, FE Trustnet
Tuesday April 30, 2013

High levels of austerity and rising unemployment will inevitably culminate in serious social unrest in the eurozone, according to FE’s head of research Rob Gleeson, who believes a full-scale crisis could be on the cards as soon as this summer. ALT_TAG

There has been improving sentiment surrounding the future of the euro since Mario Draghi’s famous speech last summer, when he declared he and the ECB would do "whatever it takes" to save the ailing currency.

However, Gleeson (pictured) believes the efforts of politicians to avert an economic crisis are simultaneously causing another crisis elsewhere.

"We’ve come to expect each summer to be accompanied by a euro crisis of some sort, and I expect this summer to be no different," he said.

"Unlike previous years, however, I don’t see this summer’s drama being driven by markets. The ECB seems to have a lid on the liquidity and solvency issues at the moment. The more serious threat to the continent is social unrest."

"While there seems to be the political will to keep the eurozone together, the price is high in terms of social cost."

"Unemployment and youth unemployment in particular – especially in places like Greece and Spain where it is around 50 per cent – is likely to see popular support for the euro project disappear."

"Political support for the harsh austerity policies being imposed by the troika will likely dissolve in the face of civil unrest."

"It will only take one country to break rank to bring the whole house of cards crashing down."

While Gleeson anticipates serious shocks in the market – and potentially even a break-up of the euro – he does not believe investors with a reasonable time horizon should run to the hills just yet.

"While a break-up and ensuing disaster are always unlikely, I think the risk is increasing slightly," he said.

"This doesn’t mean you should necessarily take drastic action – we are of course discussing worst-case scenarios."

"The most likely outcome as always is that Europe will manage to paper over the cracks and muddle along as always."

Gleeson is making no drastic changes to his own investments, but says he and his team are taking a closer look at the flexibility of European managers.

"We are paying closer attention to liquidity at the moment as small cap funds will find it harder to react should anything unexpected happen," he explained.

His fears echo those of FE Alpha Manager Jan Luthman (pictured), who said that the growing popularity of extreme politicians in countries such as Greece and Italy could signal the start of serious social unrest.

ALT_TAG "The popularity of [Italian prime minister candidate] Beppe Grillo is interesting," said Luthman in an interview with FE Trustnet in February.

"He’s very anti-austerity – indeed, he’s very anti-banks, which is even more worrying."

"The result shows that there is a limit to just how much austerity the electorate can take. There is a danger of some countries slipping into the 'ungovernable' category."

Tristan Hansen, head of asset-allocation at Ashburton, agrees that the threat of social unrest will only get worse, given the line policy-makers are taking.

"Unemployment is distressingly high in a number of countries," he said.

"The consensus view among economists is that Europe will recover as the year goes on and enter a period of low but positive growth."

"With luck that will be the case, but as long as several countries in the region remain so depressed, the risk of growing social unrest and political uncertainty will inevitably loom."

The summer of 2011 was a particularly rough time for European markets, when fears of an all-out collapse in the euro were arguably at their highest.

The MSCI Europe ex UK index fell 17.02 per cent over the course of the year, with the average Europe ex UK fund faring only slightly better, losing 15.93 per cent.

Performance of sector and index in 2011


Source: FE Analytics

Among the best-performing European funds over the turbulent 12-month period were FE Alpha Manager David Dudding’s £1.2bn Threadneedle European Select fund, which lost just 5.41 per cent, and FE Alpha Manager Peter F Fruzzetti’s €262m MFS Meridian European Smaller Companies fund. Both have five FE Crowns.

Gleeson says he is concerned by the size of the Threadneedle European Smaller Companies fund, which is headed up by another FE Alpha Manager – this time Philip Dicken.

The £1.5bn fund, which is part of the FE Select 100, remains open to new money, even though a very similar portfolio – Threadneedle Pan European Smaller Companies – recently closed at a smaller size.

Gleeson commented: "With Threadneedle recently announcing their intention to soft-close their Pan European Smaller Companies fund, which is smaller, we are concerned this fund is also nearing capacity."

"Analysis shows there has been no impact on the fund so far due to liquidity constraints, but we will be discussing the matter further with Threadneedle shortly."

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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