The European Union has to “walk a very fine line” in finding a solution to the Greek debt crisis which enables it to settle up with Greece while not causing resentment in other countries such as Spain, Portugal and Italy, according to Michael Franklin, chief investment strategist at Beaufort Securities. He spoke in an interview with Francine Lacqua and Manus Cranny on Bloomberg Television’s “The Pulse.” (Source: Bloomberg) - 02/07/2015
Topics summary
- Greece
- Interest rates
- China
- Beaufort
Greece
- Referendum on Sunday 5th July
- Possible change of government / general election
- Historical context to current problems. (Michael Lewis book ‘Boomerang’)
The Eurozone ministers walk a fine line between
(a) keeping Greece in the eurozone with special concessions and,
(b) not to start a bidding war among the voters of other eurozone countries, particularly the weaker ones (Spain, Italy and Portugal), demanding that their own governments take a tougher line and demand similar concessions.
The ECB can be expected to manage liquidity requirements within the eurozone to contain contagion risks.
Indeed, if Greece were to exit the eurozone, it could remove some of the current uncertainties and let the euro strengthen.
Conversely, a Greek eurozone (if not EU) exit could have the potential for social and financial disruption both internally and externally.
However, in terms of economic significance, Greece is currently quite small.
At estimated end-2014 values, its GDP now represents about 0.3% of global GDP and 1.3% of EU GDP.
Even if some immediate accommodation is found to keep Greece within the eurozone, this would be part of a much longer process required to restructure Greek institutions and how they are run and a shift towards greater fiscal responsibility and accountability.
Interest rates
Subject to the state of the US economy in terms of employment and inflation risk, we currently expect the Fed to raise interest rates marginally in Q4 2015.
We have to hope that they have learned the lessons of 1994 when bond markets fell back on Fed tightening after a period of low interest rates.
Wednesday’s ADP employment rise of 237k against 218k expected for June suggests today’s Nonfarm payroll numbers could come in above expectations of plus 230k although this is not guaranteed. If the payroll number is stronger than expected, it could cause the US markets to ease on concerns that the implied economic strength will prompt the Fed to tighten sooner. The US markets are closed on Friday for Independence Day (in lieu of the 4th).
After similar caveats about the economic outlook, the UK looks to be on course still for a rise in H1 2016. Any recovery in the euro should make an interest rise, and associated support for sterling, easier to implement.
Inflation does not look to be a problem and the General Election result has removed a lot of uncertainty, prompting a recovery in merger & acquisition activity.
China
The extreme volatility of the China equity markets in the past few weeks does not come as a surprise.
It is a form of coming-of-age as the middle class grows along with disposable incomes.
However, there is always the danger of some banks becoming overexposed and needing support. Frequently, the cash flow of property companies can find its way into speculative stocks.
This all adds another problem for the Government to manage alongside trying to maintain the level of economic activity to satisfy the aspirations of its population.
It is not always clear where and when dislocations will occur.
Beaufort’s Investment Approach
This year, Beaufort has seen a sharp rise in the level of its corporate activity. Its latest project , the Myanmar-based mobile phone-based social network company, MySquar, began trading on AIM on Wednesday.
Beaufort is now one of the largest brokers in terms of acting for AIM-listed mining companies.
Apart from our fundamental value-driven research approach, we use momentum-focussed technical methods to screen the FTSE 350 Index on a bottom-up basis to identify individual plays.
In the past few months, we have made money for our retail and institutional client base in shares such as Sports Direct, Anglo American, Aggreko and Astrazeneca as well as Advanced Oncotherapy (proton beam cancer treatment), Jubilee Platinum and MotifBio (antibiotic research).
