A few short months ago, the euro appeared to be in critical condition. The crushing weight of debt, particularly in Southern Europe, seemed to be sucking the life out of the European Union (EU). Now that the European Central Bank (ECB) has announced that it stands ready to provide some life support to the euro, the contagion fears seem to have ebbed, and one might even say predictions of its death were perhaps greatly exaggerated. Of course, the patient still faces a lot of painful rehabilitation, but Philippe Brugere-Trelat, EVP of Mutual Series, thinks that the outlook appears to have improved.
Philippe Brugere-Trelat’s key opinions:
- The ECB “has made it very clear that it will do whatever it takes to save the euro.”
- The ECB’s unlimited bond-buying program removes some of the risk of the euro “going bust.”
- Central bank actions are not permanent solutions; they just buy time for structural solutions to be found.
- Investors have perhaps unjustifiably devalued many European companies.
The ECB has been pledging to save the euro for some time, but there have still been plenty of skeptics. In mid-September the ECB announced it would make “unlimited” purchases of government bonds in the secondary markets to support cash-strapped nations whose bond markets had suffered severe blows. The program does come with conditions, but according to ECB President T. Mario Draghi, the program, officially known as “Outright Monetary Transactions,” aims to preserve the singleness of monetary policy.
Subsequently, a German constitutional court cleared the way for ratification of a permanent European bailout fund, the European Stability Mechanism (ESM). What does Brugere-Trelat think of these efforts to ease the crisis in the eurozone?
“It’s my opinion that it certainly does help reduce the risk of the euro going bust. The ECB has made it very clear that it will do whatever it takes to save the euro. The biggest beneficiary of the euro since its inception has been Germany. The disappearance of the euro would be a severe economic blow to Germany. Germany derives a significant portion of its GDP from exports, particularly exports to the other eurozone countries. I think what the ECB said last June—that the euro is here to stay—seems to be confirmed by the German government.”
Don’t Fight the ECB?
There is a popular saying on Wall Street: “Don’t fight the Fed,” attesting to the central bank’s power and influence on the U.S. financial system. Brugere-Trelat said the ECB is a similar power to be reckoned with. In his opinion, “those who think the euro will not survive should not bet against the ECB.”
However, he notes that while central bank monetary policy actions can be useful tools, they often only buy time and don’t correct the underlying problems.
“I think what monetary policy does in circumstances like the ones we are facing in the U.S., in the UK, and the eurozone is that it buys time for the structural issues to be resolved by the politicians. I think monetary policy and the central bank actions are not by themselves permanent solutions; they just afford people more time to get things done, and that is the good thing, but also a limitation. If no structural solution comes, central banks might do as many quantitative easings as they like, but I think it’s not likely to work in the end.”
Finding Values in Europe
Many investors have avoided Europe like the plague this year and Brugere-Trelat said he agrees there are plenty of risks. Still, he has been able to find healthy companies there which he thinks have good potential for long-term investors.
“I think a lot of investors are losing sight of the fact that there are a great number of companies located in Europe, listed in Europe, which are not very European in their footprint, that derive a significant portion of their revenues and profits from regions other than Europe. I’m referring to the large European multinationals, which because of these indiscriminate devaluations by investors, may have been trading at unusually attractive multiples. The valuations are extremely low in our opinion. That is what really we have been focusing on at Mutual Series. We are value investors. We look for good, quality companies which have been overlooked; unjustifiably devalued by investors. As a true value investor, we like to buy things when they are down.”
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What are the Risks?
All investments involve risks, including the possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated or may decline further in value. Investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. Special risks are associated with foreign investing, including currency fluctuations, economic instability, and political developments. Investments in developing markets involve heightened risks related to these same factors. To the extent a fund focuses on companies in a specific region, it is subject to greater risks of adverse developments in that region than a more broadly diversified fund. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries may increase the economic risk of investing in companies in Europe.