The Eurogroup ministers meetings concerning Greece have proven inconclusive and more talks are to be held this week. At these meetings, the biggest disagreement has been over whether Greece should request an extension to its existing bailout program, which runs out at the end of this month. Greece is opposed to the extension yet the creditors believe extending the program is the best way to keep Greece from defaulting until a more comprehensive deal has been worked out. Over the last few days, the risk of Greece exiting the Euro has increased and is now arguably higher than it has been since 2012. Despite the posturing, protracted negotiations and rising risk, I still believe that a deal will be struck. It is hard to believe that Greece would refuse some funding from creditors in exchange for some structural reforms that the government intends to deliver on anyway. If you think Greece is a macro risk then Ukraine is the epicentre of manifold macro risk, given the involvement of Russia and hawkish comments emanating from the US. Seasoned US diplomats and foreign policy experts are getting vocal about arming Ukraine. France and Germany are, clearly and very sensibly, opposed to such assistance. There is little doubt that arming Ukraine would be a bigger catastrophe than the “eastward expansion of NATO” has already proven to be. Therefore, it was heartening to read that after 16 hours of overnight negotiations last week, the leaders of Germany and France had brokered a renewed peace deal to end the conflict in Ukraine. The macro data in the US is looking better by the day, particularly on the jobs front. However, the forward-looking guidance on earnings looks weak. The US equity market, as a whole, is unlikely to register big gains immediately and looks to be suffering from fatigue after a six year Bull Run. Therefore, I believe that sector rotation and stock picking offer the better return potential until such time as the path and quantum of interest rate rises in the US are fully assimilated. Long term worries for Europe around productivity and growth remain but short-term improvements in news flow, a cyclical upside as well as relative undervaluation of European stocks, all point to Europe as a more rewarding overweight position than the US. If you start from a low base, even small improvements can mean big relative improvements, and this is what we are seeing and will see more of in Europe.
Subscribe to our mailing list and receive our Market Viewpoints directly to your inbox
© 2019 Crossbridge Capital