View the article online at http://citywire.co.uk/money/article/a669503
'Fundamentals', not Draghi, to power eurozone bank revival
Neptune head of European equities Rob Burnett says Spain and Italy's improving finances should translate into gains for 'extraordinarily' cheap banks.
Italian and Spanish economic improvements – over and above Mario Draghi’s promises of policy support – are driving a resurgence of faith in peripheral bond markets that should translate into support for over-sold European banks, says Neptune head of European equities Rob Burnett.
‘Spain and Italy are now moving to current account surpluses. This is a critical support for the bond market – policy is less relevant,’ said Burnett, who runs the Neptune European Opportunities fund , which features in Citywire Selection.
His comments come in contrast with a widespread belief that bond market vigilantes have been kept at bay since European Central Bank president Draghi promised last summer to do ‘whatever it takes’ to save the euro.
‘Draghi has helped us a bit but under the surface there’s a much more important fundamental driver as to why investors should be willing to fund the Spanish and Italian bond markets,’ added Burnett.
The difference between the yield demanded on German 10-year government bonds compared with Italian and Spanish bonds – or the ‘spreads’ – has not lurched as much during the recent Cypriot or Italian crises compared with previous bouts of the eurozone crisis.
‘Whilst there is limited political appetite for further bailouts, bond market pressure is reducing, not increasing, and bank risks are in the price.’
He says this improvement in financial conditions should bolster eurozone banks, which have underperformed other sectors since the inconclusive Italian elections last month.
‘Europe is well advanced in making large structural adjustments, yet bank valuations are at extraordinary discounts.’
Burnett’s fund, which has exposure to eurozone banks, has been hit hard by a resurgence of the eurozone crisis over the past few months, under-performing the index (with a return of just 0.4% over the past month).
‘We have not crossed a rubicon – this is not new’, Burnett says of the Cypriot bailout, which has renewed concerns about the authorities’ ability to keep the eurozone together.
However, he expects volatility for the remainder of this week as Italian president Giorgio Napolitano attempts to form a government amid political deadlock.
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