The recent weakness in Spanish bonds is not the start of a new phase in the eurozone debt crisis nor is it likely it will lead to a "new leg down in equities and other risk assets," says Skandia Investment Group's Head of Asset Allocation, Rupert Watson, commenting on the recent sharp selling of Spanish government bonds.
Watson says it’s Skandia’s belief that the problems are largely contained within the affected countries (Spain and Italy) and will not be an impediment to further equity gains.
By the end of last week (20.4.12), Spanish 10-year bond yields had risen three basis points up from 5.91% to 5.94% and Italian 10-year yields had risen six basis points up to 5.64%.
Watson goes on to explain that the imbalances within the eurozone took years to create, so markets must expect the rebalancing to also take years to complete and is made harder by the inability of the affected countries to devalue their currencies. “The economic pain, along with the political and social problems this causes, is likely to continue for some time,” he says. Last week, Spanish Prime Minister Mariano Rajoy confirmed that the country’s planned €10bn of spending cuts were necessary and would go ahead.
At the same time, Watson made clear his belief that Germany and the rest of the eurozone could bring the crisis to a close now by, for example, agreeing to the joint issuance of Eurobonds. However, he adds, Germany quite rightly sees it as critical that new governance structures are in place before such measures are considered to ensure that the affected countries continue to reform. Without these reforms, Germany could find itself funding other parts of the eurozone for years to come without any effective exit route.
By way of investment direction now, Skandia says that for those who are not directly invested in these countries, the significance of these problems is much more muted. “With corporate profits continuing to rise, valuations favourable, interest rates low and investors generally underweight equities, we think the outlook for equities remains favourable.”
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