The move by the European Central Bank (ECB) to provide more dollar liquidity to markets last Thursday was positive as it shows that it is being proactive, says Rupert Watson, head of asset allocation at Skandia Investment Group in London.
The action – also involving the US Federal Reserve, the Bank of England, the Swiss National Bank and the Bank of Japan – means the ECB will now be able to access dollars by swapping assets with the Fed.
It shows the ECB is ahead of the game, suggested Watson on a trip to Hong Kong last week. “The ECB had already been doing shorter-term dollar lending, which was taken up only in small doses – around €500 million [$683 million] last week, for example. So I don't think there will necessarily be massive demand for this three-month stuff. But they've been proactive, which is a good sign.”
The problem across Europe in the past couple of years has been its reactionary policy, he says. “European policymakers have been constantly saying 'everything's fine, we've got the tools to cope', and then somewhere the market tumbles and they respond,” adds Watson.
In this latest case, however, the ECB has suddenly taken “reasonably dramatic” action, he notes, even though recent strains in the money market have not been all that bad. That's a positive change and shows they see the seriousness of the situation.
By contrast, Europe's political leaders are aware how bad things are, but don't have the guts to take action, says Watson. “Things will have to get a lot worse for that to happen.”
Despite the money-pumping move, Greece will default, he adds, but that is only likely to happen when the European sovereign and banking sectors are in a stronger position to withstand the shock.
“Europe's policymaking has been a shambles, but when push comes to shove they'll do whatever it takes [to maintain eurozone stability], because the alternative is not something they would countenance,” says Watson. “If [German chancellor Angela] Merkel thinks she'll get re-elected following a collapse of the German banking system, she's clearly mistaken.”
Beyond Europe, Skandia is bullish on emerging Asian markets' – in particular China's – ability to weather any coming storms.
“Even if things get worse in Europe or anywhere else, Chinese policymakers would have the flexibility to react both on the monetary side – through looser reserve requirements or lower interest rates – or through fiscal policies,” says Watson.
This time, however, the fiscal policy is unlikely to involve “massive fixed-asset investment” as in 2008/9, but more likely measures to boost consumption, he says. Watson points to comments last week by Chinese premier Wen Jiabao at the World Economic Forum in Dalian that the government will ensure domestic demand stays strong so that China keeps importing Western goods.
Skandia's global funds have, since 2009, been GDP-weighted rather market-cap weighted, thereby giving more weight to emerging markets such as China. “Over the last 10 years we've seen massive outperformance of emerging markets relative to developed markets,” he adds, “and we think that will continue.”
Skandia, which runs fund-of-fund and manager-of-manager strategies and $20 billion in assets, has seven sales and marketing staff in Hong Kong, headed by Jane Fung (pictured below), but no investment staff in the region.
The firm, part of the Old Mutual group, is increasingly focusing on selling through private banks in Asia and is considering putting staff in Singapore and applying for a retail licence there to add to the type 1 and 4 securities dealing and advisory licences it holds in Hong Kong.
The licences enable Skandia to present and advise on investment propositions to direct retail investors, but thus far it has only dealt with professional investors.