Institutional investors' short-term views on the eurozone have made an about-face in 2012: Where fears and contagion dominated just a few months ago, optimism and hope seem to abound.
European equities have surged, yields on the sovereign debt of peripheral countries like Italy and Spain have fallen from historic highs, and the jubilance has spread to equity markets around the world.
“The same people who could only see things from a gloomy perspective before Christmas (now) seem to find silver linings in absolutely everything,” said Robert Machell, partner at activist equity investment and consulting firm Governance for Owners LLP, London. Mr. Machell helps manage the €1 billion ($1.3 billion) GO European Focus Fund.
But experts warn that the eurozone's main problems — the overwhelming sovereign debt burdens and lack of economic competitiveness of the weaker members in its periphery — are longer-term issues that haven't been changed by the recent run of lower volatility and lack of contagion from Greece's need for a second bailout package.
“It remains to be seen whether European politicians can pick up the baton and address the structural issues that underlie the problem,” the biggest of which is the need for economic growth, especially in the less-competitive markets such as Greece, Portugal but also in Italy and Spain, said Kieron Nutbrown, head of global macro, fixed income, at Aberdeen Asset Managers Ltd., London.
On Feb. 13, Moody's Investors Service Inc. downgraded the debt of Portugal, Italy, Spain and six other European countries, citing the nations' and the region's “deteriorating macroeconomic outlook,” according to a Moody's news release at the time.
“The rally (in 2012) is, in essence, a relief rally,” said Nicolaas Marais, head of multiasset solutions at Schroder Investment Management Ltd., London. Last year, investors were “terrified” that Europe would produce a Lehman Brothers-like crisis, a risk that now appears less likely, he said.
Also, many investors underestimated the U.S. recovery. “If you take the two of these together ... that's resulted in a very positive rally” in most world equity markets, Mr. Marais said.