Thursday, May 10 2012
European Risks Revisited
European risks have raised their head this week with elections in France and Greece signalling the commitment to austerity from the electorate is wavering.
Socialists were elected in France and they have signalled they prefer to promote a greater balance between economic growth, austerity and taxation to get their budget in order. We note they are still committed to delivering a budget surplus. We think this is reasonably sensible but we are unsure of the Socialist commitment to delivering the kinds of improvement to the labour market that are necessary to improve productivity. The challenge will be the political wrangling with the Germans to adopt policy that meets these new objectives but does not seem to be insurmountable.
The Greek elections resulted in the 2 mainstream parties falling short of a majority. In the next few days they will seek to form a Government with support of one of the minor parties (who are against the current austerity program). If they cannot form a Government then another election will be called which may or may not offer the same result. Some of the minor parties appear open to joining a coalition but all are asking for the renegotiation of the whole austerity program. This is unlikely but parts of the program are likely to be up for renegotiation and it increases the likelihood of a further Greek default. If Greece does not find a way through this situation then it does raise the prospect of it leaving the Eurozone.
Greece remains troubled and Europe faces very soft economic activity. This is not really a surprise to anyone. However, the added uncertainty has been reflected very quickly into equities with resources and financials bearing the brunt. While it is understandable that financials would pull back, we have been surprised by the extent of the pull back in resources which should be more exposed to economic activity in China which seems to be accelerating.
The uncertainty might well act as an overhang for global markets until they become a little more comfortable with the new political reality. This is despite seemingly already priced for considerable risks. Australian equities seem better placed in light of pressure easing from lower interest rates, currency and China bouncing.
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