Fidelity International head of multi asset Bill McQuaker lists the UK alongside the US as the equity markets best protected from volatility in the eurozone.
In Spain, the government has collapsed after Mariano Rajoy lost a no confidence vote on Friday and Socialist leader Pedro Sanchez has replaced him as prime minister.
Italy cobbled together a government late Thursday night after sending markets into turmoil this week when it appeared fresh elections were on the table. Its president rejected the coalition government’s proposal for finance minister, who was planning to introduce an alternative currency to the euro, despite not campaigning on that mandate.
McQuaker said: “The UK doesn’t have any of the euro problems… the country can create its own monetary policy.”
UK equities are quite cheap and “desperately under-owned” by overseas money, McQuaker said. “The make up of the UK stock market, particularly the big stuff, has a lot of dollar exposure.”
The US equity market is traditionally where investors turn when trouble erupts elsewhere, he added.
The UK has been one of the stock markets least sensitive to European bond yield spikes over the last 10 years, said Rathbones head of asset allocation Ed Smith. The US, Canadian and Korean markets are also less sensitive, he added.
The yield on 10-year Italian government bonds rose approximately 70 basis points this week to a four year high.
Smith said: “The gap between UK valuations and other markets is unusually wide. Clearly that is about international investors ditching the UK because they don’t want to worry about Brexit. That potentially provides a valuation cushion.”
Rathbones is underweight Europe and neutral on the UK market, albeit pessimistic on the economic outlook.
McQuaker has been underweight Europe since the end of 2017.
“That was about the risks surrounding global growth momentum, but it means I’m less troubled about these political developments than some investors are,” he said.
New Spanish PM
While Italian and to a lesser extent Spanish uncertainty have rattled markets, investors have played down the existential risk to the European Union or the single currency.
In Spain. Mariano Rajoy’s seven-year reign as prime minister came to an abrupt end on Friday after a no-confidence vote in parliament on following a corruption scandal in Rajoy’s Popular Party. New prime minister Pedro Sánchez – who heads the centre left party Socialist Party – presides over a weak government and is likely to call an early election.
Spanish polls are led by the centre-right pro-EU Ciudadanos party.
“They’re not the sort of party that are going to tear up the fiscal rule book, piss off Brussels and cause themselves to be booted out of the euro club to the devastation of markets,” Smith said.
Newton Investment Management head of fixed income Paul Brain said he was not expecting significant widening of Spanish bond spreads to Germany. New prime minister Sánchez has said he will stick to the 2018 budget negotiated by his predecessor.
Syz Asset Management CIO Fabrizio Quirighetti said they added to Spanish five-year government bonds on Tuesday in their euro fixed income funds. “As far as Spain is concerned, we think the current political uncertainties, not at all related to any anti-euro sentiment, just arrived at a bad time.”
The Swiss asset manager is neutral on Spain and has “very low” exposure to Italian government bonds.
Euroscepticism overdone
Miton European Opportunities fund managers Carlos Moreno and Thomas Brown said Italians are overwhelmingly pro-euro and an exit from the currency was extremely unlikely.
Despite its Italian overweight, the fund is up 2.6% over the last month.
Franklin Templeton Investments head of European fixed income David Zahn said the Five Star and League parties in Italy were not elected on an anti-euro ticket but on a platform of reform in Europe.
However, Smith noted Italian voters have a higher proclivity to back populist or “economically misguided” candidates. “It’s got a very low proportion of its workforce with undergraduate degrees and has very poor social benefits. These things tend to increase support for dangerous governments getting in.”
