The German government has gradually realized that it will have to extend Greece’s bailout, Christian Gattiker-Ericsson, Chief Strategist & Head of Research at Julius Baer, the Swiss bank, told CNBC on Wednesday.
“The news is sinking in, at least on the German side that something has to be done, Gattiker said. “There’s always conflicting news, but I think it’s really sinking in that there has to be further help on that side."
“Probably an immediate reprofiling or debt restructuring would be fatal to some of the German banks because you start down this way you run the risk of having to recapitalize European banks by 300 billion euro ($432 billion). This is the other side of the coin that has been neglected in the public discourse in Germany over the last few weeks," he said.
De-risking is likely to continue in the markets, Gattiker believes.
“This is not necessarily linked to the short-term news flow, which we think is so noisy. It’s more like something is bound to happen, investors have been too enthusiastic, lead indicators are rolling over, so if you look at the risk that there still might be some debt restructuring, we think we are right to be in a risk-off mode,” he said.
Financials will see a resurgence by October, he thinks.
“If you look at overall equity markets they have been quite resilient. Most of it is due to a sector shift with some of the defensive, boring, non-cyclical areas really cheap. Whether you can make money in an absolute sense in some of these defensive sectors is another question,” he said.
Gattiker believes that rising financial stocks will drive a market rise from October. “We’ll stay on the sidelines and be more conservative over the summer,” Gattiker-Ericsson said.
He predicts “changes in market perception of the peripheral European situation” will help boost financial stocks.
“Usually over the last two years, when the market has been bearish on financials, that’s actually triggered a rally, so usually what you get is quite sharp reversals,” he added.
When it comes to selling in May and going away, he said: “It always makes investors sleep better if they’re a bit conservative over summer.
“I think there will be huge opportunities. I think investors would be better taking a longer vacation, but traders should stay at their desk."