Kicking the can down the road is working, says Neptune's Burnett
The European Union’s strategy of ‘kicking the can down the road’ appears to be paying off, suggests Neptune European Opportunities fund manager Rob Burnett.
In an update to investors, Burnett argues that the eurozone crisis is more a matter of competitive imbalances rather than debt burdens and says improvements have already been seen in most of the periphery.
The manager also reveals that he has moved away from some lower-risk sectors in his £812.8m portfolio in anticipation of renewed growth on the global stage.
“Debt is almost a bit of a side issue, we don’t see debt as the primary driver of the [eurozone] problem – it’s actually a lack of competitiveness,” he says. “That lack of competitiveness in certain countries is making debt levels unsupportable.”
Between 1999 and 2008, Europe experienced a strong credit boom and high capital flows – which Burnett claims “masked” a build-up in competitive issues. Unit labour costs went up rapidly in the eurozone periphery while falling in Germany in absolute terms, which had the effect of making Germany too competitive compared with its peers.
“The sovereign crisis itself is just the market mechanism of causing this to come back into balance. High sovereign bond yields is the market’s mechanism to slow growth down, to push up unemployment and to drive wages down and to therefore increase country competitiveness,” the manager says.
“It is very scary but the underlying logic behind the market is benign – it is trying to enable these countries to grow sustainable within the single currency. The only way they can do that is large unit labour cost adjustments.”
Burnett says Ireland has shown vast improvements in this area over the past few years as wage growth has slowed. Furthermore, Greece’s unit labour costs have started to ease while Portugal and Spain are likely to have become more competitive within the next two years.
“The system needs time and the kicking the can down the road policy prescription from the Bundesbank is arguably working. Everyone is looking at debt levels and because [the periphery’s] economies are shrinking, they think the debt is going up and therefore we are not making any progress. But actually it’s more about competitiveness and if we can improve competitiveness, countries can handle higher debt levels over time.”
Burnett also believes global growth momentum appears to be stabilising and he predicts an acceleration in the coming weeks. This is likely to be driven by the recent coordinated central bank action, falling oil prices, improvements in the US housing market and a strengthening in the Chinese economy.
In anticipation of this, the manager has shifted to an underweight position in classic lower-risk sectors such as consumer staples and healthcare.
At the same time, he has modestly increased his exposure to more cyclical areas such as consumer discretionary, industrials, energy and materials – expecting them to benefit from increased upside support over the coming three to six months.
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