The market rally and return to riskier assets since the start of the year has led to optimism for a more sustained recovery – but the situation is actually more like the beginning of 2011, which was followed by near-disaster in the euro zone, according to Richard Cookson, chief investment officer at Citi Private Bank.
“The profile looks eerily similar to last year for a lot of the same reasons,” he told CNBC Tuesday.
“This isn’t a normal market recovery, if you look at the state of central bank balance sheets, what’s happened to global growth or global profits. It’s a bit like being in an abusive relationship where the abnormal becomes the normal.”
The market has also been buoyed by better-than-expected economic data from the U.S. – which Cookson believes could be a mistake.
“There are a lot of problems with seasonal adjustment of data in the U.S. A very warm winter has brought forward a whole bunch of activity and you’ll get payback from that,” he said.
“You have had the most anemic recovery since the 1930s with the loosest monetary and fiscal policy we’ve ever seen. Deleveraging is still going on and that’s a very powerful growth constraint and a disinflationary force.”
The euro zone debt crisis which dominated the European markets agenda for most of the second half of 2011 has not gone away either.
“The euro zone is starting to kick off in the same way it did last year,” Cookson warned.
Much of the early months of 2011 in the euro zone were spent trying to force through Greece’s second bailout deal. In recent weeks, the focus has turned to Spain, the currency region’s fourth-largest economy. The region’s finance ministers have now raised the amount their bailout funds can lend to 700 billion euros ($1.1 trillion) in response to worries about other euro zone countries.
The European Central Bank helped boost the European banking system through two mass liquidity injections, which helped restore confidence in the European markets.
“There’s less to the firewall than meets the eye,” Cookson, who hasn’t had a peripheral euro zone bond in portfolio since April 2010, said.
“You’re very heavily subordinated as an investor to the IMFand the ECB . It’s like a hamster running on a wheel – you’re not paying off this debt.”