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Sipp Investor: the implications of Europe's failure to heal itself
The latest European summit revealed just how distant a solution to the eurozone crisis remains, says Rob Kyprianou, and as a result he's struggling to get excited about equities (shares).
What a difference a day makes! The announcement of a new deal for the European Stability Mechanism (ESM) and the creation of a eurozone bank supervisor following the 28/29 June EU summit triggered a very sharp one-day rally in European equities on the last trading day of the month.
Being underweight equities in general and very underweight European equities in particular, this rally hit the performance of my self-invested pension portfolio (Sipp).
In June my Sipp rose 1.4% in value, bringing the gain year-to-date to 5.1%. However, boosted by the last-day spurt, my benchmark (50% UK equities, 25% eurozone equities, 25% UK gilts) jumped by 3.7% on the month, bringing the gain for the first half of the year to 0.4%.
Beaten by the benchmark
This is the first month of the year that my Sipp performance has lagged that of my benchmark, reducing the excess performance to 4.7% for the year so far and to 6.5% over the past 12 months.
The one bright spot in the portfolio was the performance of the three bond funds I bought in May (see previous article), which outperformed the UK gilt market on the month. In June I doubled these positions, and they now account for 19.5% of my portfolio, reducing the cash position to 25%.
Another missed opportunity
I do not trust this one-day – albeit spectacular – response to the EU summit. This was the 19th summit since the eurozone crisis began and it represents another missed opportunity. More significantly, it has demonstrated the serious political fragmentation of Europe that is currently undergoing.
It also witnessed a potentially significant shift in the political centre of gravity within Europe, with the emergence of a nascent alliance of France, Italy and Spain – a 'HoMontJoy' (François Hollande, Mario Monti and Mariono Rajoy) axis to replace the 'Merkozy' Franco-German alliance so long at the political heart of the eurozone.
Among the mandarins of Europe there is clearly a strong appetite for fundamental measures to address the euro’s structural fault lines. The heads of the ECB, the European Commission, the EU Council and the Eurogroup presented proposals to the EU summit that would address the four pillars for a workable monetary union.
These pillars are an integrated budget policy, deeper economic coordination, a banking union and the 'democratic legitimacy' for a transfer of powers to the European centre.
The rally unravels
Instead of a wholesale agreement that could have demonstrated a commitment to the euro, we were given the absolute minimum – the use of the ESM to support the recapitalisations of the banking system directly, supported by a new eurozone banking supervisor. And even this bare minimum began to unravel within 24 hours as political leaders went home and gave their own, clearly unaligned versions of what had been agreed.
The outcome clearly represented a victory for HoMontJoy, who demanded more bailout funds without strings before any transfer of powers. Merkel was the loser, wanting the transfer of powers first.
Merkel, Neville Chamberlain like, went home and tried to reassure her domestic audience that ESM bailout funds would come with conditionality. Monti and Rajoy in turn played down conditionality, while the Dutch and the Finnish effectively said 'over my dead body' would they support the summit agreement.
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