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Sipp Investor: Draghi can't save the euro
The ECB head's pledge to do 'whatever it takes' to save the euro was a statement beyond his pay grade, Rob Kyprianou says.
I have to admit to being surprised by the resilience of equity markets in recent weeks, especially in the developed world.
Despite no sign of relief from the global growth slowdown, despite downward earnings revisions and cautious words from corporate executives, and despite the lack of evidence that policymakers can reverse the drive to depression in the eurozone, equity markets in July built on their strong June gains.
Although I'm underweight equities relative to my benchmark, my portfolio managed to outperform its index in July. The value of my self-invested pension portfolio (Sipp) rose 2.2% during the month and has risen 7.5% since the start of the year. My benchmark (50% UK equities, 25% eurozone equities, 25% UK government bonds) rose by 1.8% on the month and has risen 2.2% so far this year.
My heavy overweight in emerging market equities, where I have 25% of my portfolio and 42% of my total equity holdings, helped performance in the month. My UK equity funds also performed well, with special mention to J.O. Hambro (Equity Income and Opportunity ) and AXA Framlington (UK Select Opportunities ). In my bond portfolio my chosen funds either held their own or slightly outperformed the UK government bond market.
Draghi plays Atlas
The eurozone remains the biggest risk to investors. Following systemic failures by politicians to address the euro’s structural fault lines, the president of the European Central Bank (ECB), Mario Draghi, decided Atlas-like to take the weight of saving the currency onto his own shoulders.
In a speech in London he squared up to financial markets and declared that 'Within our mandate, the ECB is ready to do whatever it takes to preserve the euro – and believe me, it will be enough.' To make sure the point was not lost, he delivered his remarks with a firm voice and a steely stare at his audience. It was about as definitive a declaration of intent as you could get, especially from a central banker.
But was this a Churchillian act of defiance, heralding an impending rout of euro speculators, or a gesture of futility? It was certainly out of keeping with the traditional approach of the ECB to the crisis. Up to now they have made it clear that the solutions to the euro’s difficulties lie squarely in the hands of politician,s and that they had better get their acts together.
Did Draghi’s remarks signal a new source of hope that would bring an end to austerity and a return to growth and financial stability across the eurozone? The markets seemed to buy into it as yields on peripheral country debt fell sharply and equity markets in Europe were reinvigorated.
An effort doomed to failure
But – and I am afraid there is a big but – the task of saving the euro that Draghi seemed to take on is not only beyond his mandate, it is way beyond the ability of the ECB to deliver.
The problem with the euro construct that is driving periphery countries into depression and the eurozone into deflation is not a monetary phenomenon. The fundamental problem is the lack of political structures, institutions and governance behind the single currency. And we can now add to this list the lack of the political will to place the interests of the euro and European integration over domestic interests as Europe fragments politically in the face of the crisis.
Unless the ECB plans a military coup of Napoleonic standards that would give it control of Europe’s governments, saving the euro is way above Draghi's pay grade. The ECB has the means to help mitigate the financial market fallout from (gross) European political bungling, it has the means to help buy politicians time to try and get their acts together, and it has the means to help political leaders sort out the crippled banking system if politicians showed any inclination to do so. But there is no monetary weapon at its disposal that would solve the political deficit behind the euro’s chronic misconstruction.
Still waiting for the 'big bazooka'
Having raised market expectations in such a dramatic way, the market waited for the ECB’s 'big bazooka' that would blast away the Euro’s foes. We are still waiting.
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