“We had been slightly underweight European equities since the beginning of the year, but went back to neutral last week, and recommended clients on Monday to implement this,” says Joachim Klement, chief investment officer of Wellershof & Partners, a Zurich-based investment consultancy. “We are now pretty confident that there will be a deal by the end of the week,” he adds.
In fact, markets started to rally just as Klement decided to increase exposure, as investors seemed to possess a crystal ball of the kind Angela Merkel would have been very keen on. Since July 7th, European stocks have risen by more than 8% on average. The ‘post-agreekment’ rally seems to be short-lived though, as stocks halted their rise on Tuesday, with European benchmark indices broadly flat.
Confidence in Europe
That most of the rally had already occurred when a Grexit seemed very well possible, at least in the eyes of Europe’s political leaders, reflects a perhaps dangerously large confidence by investors in the latter’s ability to compromise. One would better not try to imagine what would have happened to the markets if EU Council president Tusk had not called back in Merkel and Tsipras at 6 am on Monday morning, when talks were on the verge of collapsing…
Quite some European fund selectors had been tactically decreasing their exposure to European equities in the past few weeks, helping to explain the falls in prices. One of these sceptics was Tristan Delaunay, who leads the French multi-manager boutique Athymis Gestion and had neutralised the bulk of his European equity exposure by selling futures on the Euro Stoxx 50 index.
“I have now started to buy back these futures, and also have reduced my exposure to the dollar, though I will increase it again during the coming weeks,” he says.
“We are risk on again,” says David Karni, head of fund selection at the Italian cooperative bank BCC Risparmio & Previdenza. “But we know that it won’t be a linear uptrend.” Karni increased his exposure to European equities from neutral the day after the referendum, in the belief the ECB could manage a Grexit.