Equity Weakness Ahead as Fiscal Union 'Riot' Continues
Market participants will continue to "riot" to get policy makers to integrate fiscal policy across the euro zone and help restore consumers' confidence in the banking system, creating weakness in stock markets, Nancy Curtin, Chief Investment Officer of Close Brothers Asset Management told CNBC on Wednesday.
"There’s a lot of clarity in terms of what people are looking for in Europe, debt monetization, a fiscal political union (...). We believe they’re going to carry on to riot until they get it and that creates equity weakness ahead," Curtin said.
“You can’t get economic growth when the credit mechanism is broken,” Curtin said.
As lending growth in Europe and the UK has turned negative, and the three elements of bank lending - or the 3 Cs: confidence, clarity of regulation, and capital - got a bit more "hazy" due to thelibor fixing scandal, "confidence in the bank lending system needs to be restored," Curtin noted.
"It's the conundrum of markets: is the economic slowdown which we’re clearly seeing a function of fiscal austerity, the excess (...) of leverage that still needs to be worked off, the non-function of the credit mechanism and how much confidence is linked to the missteps or inability of policy makers to lead Europe out of the crisis. We have the fiscal cliff ahead in the US and the slowness of the Chinese officals to pursue fiscal and monetary policy,” she said.
To reduce the risk capital in Europe, the European Central Bank (ECB) needs to be able to print money and monetize debt, she said.
“The rates in Europe across the euro zone, not so much for bunds, are higher than they should be and there is a fear for default if the central bank can’t print,” Curtin said. She added that “it’s not about the 25 basis point rate cut from the ECB, that sort of misses the picture.”
Despite the current economic difficulties, Curtin said she thought the UK was an interesting place to invest. “The markets are not that liquid, but you can have your maturity and double your yield with companies that have oodles of cash flows and absolutely have the capability of paying back over the two to five year paper that we’re purchasing,” she said.