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'We've seen the worst' in Europe, says Old Mutual's Lilley

European fund manager Kevin Lilley is keeping a cool head before next week's policy meeting at the European Central Bank.

 
'We've seen the worst' in Europe, says Old Mutual's Lilley

Earlier this week markets were shaken from their summer lull when Spanish and Italian bond yields moved back towards their crisis highs.

The yield on the 10-year benchmark in both nations hit its highest level in two weeks on 29 August, with Italian debt rising to 5.85% and Spanish to 6.52%. This raised fears both countries were returning to the crisis levels they hit earlier this year, which saw yields past 7%.

The tension has subsided in Italy since, with yields falling to 5.76%, while Spanish debt has risen marginally higher to 6.598%.

Given what happened earlier this year it is understandable that alarm bells were ringing once again.

However, Old Mutual Asset Managers’ Kevin Lilley (pictured), manager of the Old Mutual European Equity fund, is keeping a cool head and does not think things will get as bad as they did.

Lilley said: ‘I think we’ve seen the worst of the newsflow. It’s very difficult to see the news getting worse than it was in the second quarter of this year when you had European politicians arguing head to head while Greece was having great difficulty forming a government.

‘From here I think things stand a chance of improving, bearing in mind we’ve got the events in September such as the ratification of the (European Stability Mechanism) ESM by Germany and hopefully the resolution of the Spanish banking bailout programme. Then hopefully that will start to restore business and consumer confidence, which will allow the economy to start recovering.’

The Spanish problem

With regards to Spain, Lilley expects yields to fall over time as the reforms made by the nation’s government start to take effect. 

'The Spanish government needs to make strategic decisions to improve the competitiveness of the workforce. Labour costs rose to be among the highest in Europe, and that clearly wasn’t sustainable,’ Lilley said. 

‘Some of the reforms that are being put in place at the moment are there to bring down those labour costs, to make Spain a more competitive nation. The bond market will like those kind of measures and gradually yields will start to fall.’  

Lilley also believes that if the Spanish bank bailout programme is completed the pressure on yields will ease.

‘At the moment we’re waiting until September for the results of an independent audit on Spanish bank liabilities in the property sector.

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33 comments so far. Why not have your say?

Dimitrios Philippelis

Aug 31, 2012 at 06:58

Are you sure?

Have we seen the 5th QE in the UK?

I cannot understand why you are dealing with Spain and Italy and NOT for UK?

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Foston Yokel

Aug 31, 2012 at 07:18

There are more hopes in this interview than in the "Roads" series of films. I hope this guy is right but suspect he is trying to talk a market up. The events he alludes to all have car crash written all over them.

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Tom Bayley

Aug 31, 2012 at 07:45

Money printing. Simples. It's the only solution - it will have to continue until the debts have been inflated away and the balance of payments are back inline. It's what the US and UK are doing, and even the Chinese. They just have to figure out how to give Germany a (rather large) cut.

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Harry Brooks

Aug 31, 2012 at 08:28

Dream on

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Johnwg

Aug 31, 2012 at 08:37

I cannot escape the feeling that this man needs to say these things to support his fund. It seems to me that we have just postponed Eurogeddon by a series of sticking-plaster solutions. Thinks may change after US elections!

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Ptolemy

Aug 31, 2012 at 09:11

"Old Mutual Asset Managers’ Kevin Lilley (pictured)"

Really? Is he a flag waving Castro-look-a-like?

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joe stalin

Aug 31, 2012 at 09:18

I think mr Lilley is probably right.The Germans have been confronted often enough by the fact that they have beefitted enormously from the weakened Euro probably by more than they are likely to have to stump up to support it not to mention the costs of re-unification for which all of Europe paid. The ECB will get the authorities it needs to provide the financial muscle required. The are more optimistic signs coming from the US particularly wrt to the housing market. Suresome will continue to keep looking back but that will lead to more opportunities to make money lost. Look at individual stocks and listen to what their mangements are telling you. those that have survived are in great shape and are still being materially undervalued in this thin volume manipulated market. Look through the games that are being played by a handful of HFT spivs and do some research. Europe is sorting itself out because the alternative is not worth considering. Worry about making some money as second guessing politicians is a mugs game.

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S-ville

Aug 31, 2012 at 09:25

joe stalin - the 'optimistic signs' from the US will come to a screeching halt in 2013.

With regard to the article - shouldn't there be an 'Advertorial' sign above it?

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jeffian

Aug 31, 2012 at 09:30

GREECE! There. I've said it. The word that appears nowhere in this story but hangs over the whole thing like a cloud. Unless the Germans do a complete U-turn and agree to underwrite Greece indefinitely, it simply has to default whether in the Eurozone or not. Default means a panic in the markets as everyone looks to see which banks and financial institutions are holding worthless bonds. Never mind what the politicians say about 'doing whatever it takes'; structural debt in certain European economies is a boil which has to be lanced and all they can do is choose whether that is in a structured or unstructured way.

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joe stalin

Aug 31, 2012 at 09:51

@s ville maybe you are right in that there sould perhaps have beenadvertorial above the article but then is it not the kind of thing Citywire mostly tends to publish? Mr Lilley has done ok in his fund outperforming his "benchmark" by about 2% so at least he has made money over inflation for his investors. Again the US is well aware of what may happen in 2013 hence we are waiting with baited breath on what Ben may or may not uter at Jackson Hole this afternoon. Greece is not the poblem it was as most have taken the hit have moved on Even Credit agricole is now close to selling Emporiki There have always been buyers for distressed assets and those that needed to be sold have been while those that have been retained will slowly appreaciate in value. A credible plan in Europe is close I feel and that will se the bond vigilantes move on to something new to screw with and lead to a reduction in peripheral europen rates giving the breathing space needed. The manipulators have got what they wanted the markets have done nothing since May and money remains parked on the sidelines. losing in real terms .A decisive move wrt to the ECB wil be the signal that bring volumes back into this market and the rising tide will lift all boats and see the shorters forced to capitulate.

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Anthony O' Grady

Aug 31, 2012 at 10:04

Fund managers, tut

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Merlin

Aug 31, 2012 at 10:10

The Euro has only been seen to work during a time of over borrowing. Without this almost unlimited credit the inherent flaws have now shown themselves.

One interest rate cannot be right for all the economies within Europe. This was obvious to some people right from the word go. It is something akin to religious fervour that blinds our "leaders" in the EU from admitting to this.And the problems don't end at the the borders of the EC. The whole system is suffering from lack of trust. The markets are manipulated widely and greed and dishonesty rule the day. Banks are too big to fail and can get away with criminal behaviour. Giant corporation are so powerful they just buy off the regulators when it suits them. The top 5% keep getting richer, the poorest loose what little they have. Prices go up,jobsget lost.Lilley lives on another planet!

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sgjhaghsdg

Aug 31, 2012 at 10:59

I've done very well out of my European investments over the last 12 months. I've been mainly buying into ITs that invest in this sector when their discounts were very wide. They have narrowed a fair bit now, but I think there is more value to out yet.

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Geoff Downs

Aug 31, 2012 at 11:16

If there are people who want to invest in these markets then that is their right. I say stand back and let them do it. The prospect of easy money will always attract people. For some I fear there will be a huge price to pay.

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jeffian

Aug 31, 2012 at 11:58

joe stalin,

Greece is only "not the problem" if you think they have solved their structural deficit and can move forward from here with a clean sheet. Yes, historic bondholders agreed to take a 'haircut' but, firstly, I don't believe that the banks have been honest about recognising the extent of their bad debts and, secondly, Greece has to go on issuing (unrepayable) bonds indefinitely just to cover its current expenditure. Something has to give, and it hasn't yet.

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Anonymous 1 needed this 'off the record'

Aug 31, 2012 at 12:32

sorry you cannot keep spending more than you earn, the correction will come..... the worst is still to come.......

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snoekie

Aug 31, 2012 at 13:02

Well, Lilley has stuck his neck out, but has he forgotten that October is usually the dreaded month when bad news has hit the fan like the proverbial?

Next week people are back from holidays and I guess times will be interesting.

I will be trying to keep my powder dry.

We have yet to hear the result of the Germans case to it's constitutional court.

I still get the feeling that the EZ situation is sending more bad money (printed) after the bad money it has already spent.

Listening to Romney early this morning didn't reassure me. More missile shields talked about, complained of softness towards Iran, and about another trillion borrowed by Obama, but nut no solid proposals of how he was going to fund his expenditure nor much about cuts, other than Obama care. They are too deep in the hole to do this by cuts alone. Whilst he talked about not no tax rises for middle America, noticeably absent was no commitment not to raise taxes. I think that is a gimme.

Romney may cut Obama care, but he is going to have to put something akin to it in place.

Methinks still more gallons of blood in the water to come, and the ride will be nail biting. Never mind the Ides of March, we still have black October to come.

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Tom Bayley

Aug 31, 2012 at 13:20

"sorry you cannot keep spending more than you earn, the correction will come..... the worst is still to come......."

Yes, you can! But only if your cumulative debts are being inflated away.

Which road is easier: Money printing or austerity? Which one do you expect politicians to take?

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Tom Bayley

Aug 31, 2012 at 13:34

Put it another way: Creditors (globally) have made bad loans to overstretched debtors. Debtors need to find discipline but creditors also need to take a partial haircut. Creditors will not volunteer to do this, and they have leverage over governments, therefore we had bailouts. The political solution is a show of austerity and a backdoor haircut for everyone via money printing and inflation.

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Geoff Downs

Aug 31, 2012 at 13:38

Tom Bayley, You are right to say they will try to inflate their way out of this debt problem. You are wrong to think it will work. Deflation is on the way and as I have said many times we should look at Japan and see what has happened there.

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Tom Bayley

Aug 31, 2012 at 13:55

We have deflation because of the unwinding of broad credit money. Base money printing should be used to offset that - that's one of the rationales. I don't believe Japan went that far, though please correct me if I'm wrong. Also Japan was a culture of savers. Anyone here interested in saving? Personally, I've given up on the idea of retirement.

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Tom Bayley

Aug 31, 2012 at 13:58

Must be hard to take for someone who is already retired of course...

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Tom Bayley

Aug 31, 2012 at 15:07

Interesting perspective for those who think QE will bring disaster:

http://www.positivemoney.org.uk/wp-content/uploads/2012/08/BoE-vs-commercial-bank-money1.jpg

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Dimitrios Philippelis

Aug 31, 2012 at 15:12

Citizens of UK have become familiar to the QE parameters of being crooked. Do you really think that QE is the practice which protect a country from being bankrupted? Have you heard about Russia's entrance to the WTO?

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Drake

Sep 01, 2012 at 10:33

Dimitrios, I really think you should go back to Greece and put your unusual talents to work helping your fellow citizens.

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Dimitrios Philippelis

Sep 01, 2012 at 11:44

@Drake,

Thank you for your so "precious" advise you sent me unsolicited.

Keep it for your self. You are not eligible to do it and I did not ask you

Do you know of course how an unsolicited offer to "sell" is an absolute violation of the rules and ethics of course but a normal practice of boiler room that lots boom nowadays. You try to sell "ideas" and etc without asking you to do it. This of course is highly unpolite and crude behavior. You should be a youngster and for that you gained my tolerance.

Come to the "buy" side of EUR and protect your assets

Remember target price of 1 EUR\GBP 2 due to lack of QE from EUR,(€).

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Drake

Sep 01, 2012 at 11:53

Dimitrios,

I never understand a word you say. Goodbye.

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Dimitrios Philippelis

Sep 01, 2012 at 15:05

@Drake,

Your tongue twister is eligible for a German languge prize.

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Anthony O' Grady

Sep 01, 2012 at 15:23

Chill boys chill

Jeremy Grantham of GMO reckons that markets could halve from here, and given his forecasting record I know who I'm paying attention to!

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John Thorley

Sep 03, 2012 at 01:30

I would love to be convinced by this article and all the spin the IFAs are churning out that you need to 'get in now' but I'm just not!

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Graham Barlow

Sep 03, 2012 at 11:18

I think the European and USA debt crisis is beginning to change the World's international trade. The Chinese down turn in exports Is here to stay and if anything it will go on decreasing. Industry after industry in China has seen a dropping off in demand inspite of even lower prices. The Chinese Government has tried to weaken their currency, but it has failed to stimulate further exports. Protectionism in certain sectors of American industry is beginning to appear(Tyres), and there is now a drive both in Europe and the USA for local sourcing ,not only in efficiency but also quality control and overall pricing and efficient delivery dates. . Some industries that the Chinese have heavily invested in and imported foreign equipment have totally dried up for Political decisions taken in the West. The overall effect of this will be to reverse Capital flows where the Chinese will have to buy into Western Business on shore or invest in new Plants in situ in Europe or the USA. The big sea change in Europe is yet to come as the Elections begin to change the attitude towards the hide bound EU and its ineffectually managed currency the Euro, . My view is that prepare for turbulent waters, and dont be complacent.

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Harry Brooks

Sep 03, 2012 at 11:36

Barlow sounds smarter than Lilley

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Leander

Sep 04, 2012 at 01:02

I suspect Lilley has too much staked on the Euro by the look of this less than objective article and is looking to turn the market all on his own. When all of the euro elite have returned from their hols, we can expect yet more pressure on the toytown Euro. Germany benefits from trading in a Euro undervalued compared with the alternative new new mark should the Euro collapse-and that just wouldn't do!

Meanwhile southern Europe slides towards disaster because European politicians want to create by stealth a country called Europe. In years to come people will look in wonder at this folly created out of political vanity.

But take heart; the early autumn has, in the past, brought us the second World War, the Wall Street crash, Black Monday, and even Golden Wednesday

The EU needs to be dissolved and quickly - better off out

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