Schroders Plc, the 200-year-old U.K. asset manager overseeing $284 billion, will enter 2012 with the lowest amount of equities allowed in some funds as it forecasts a worse-than-predicted recession in the euro area.
“If the wheels come off, we’re in for a scenario no-one has ever witnessed before,” Alan Brown, chief investment officer at the London-based company, said in a presentation today, in reference to the euro area’s escalating sovereign-debt crisis. “It’s important for us to know if Germany and France will come up and do something in the eleventh hour” before committing more money to equities. “It’s a binary outcome and we need more clarity.”
The Stoxx Europe 600 Index has lost 21 percent since this year’s peak on Feb. 17 as borrowing costs for the most indebted euro-area nations soared amid concern they will struggle to finance their debt. At a bond auction today, Italy had to pay above the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts from the European Union.
The euro area’s gross domestic product will probably contract 1.8 percent next year as banks sell assets and governments rein in spending, Azad Zangana, European economist at Schroders, said in the presentation today. The median prediction in a Bloomberg survey of 29 economists calls for growth of 0.5 percent.
The slowdown on the continent will also drag the U.K. into a recession, with the economy contracting 0.4 percent in 2012, Zangana said.
Schroders’ funds with a discretionary or flexible mandate hold about 30 percent in equities, Brown said, adding that the allowed range is “between 30 percent and 80 percent” of total assets. The firm has invested in gold as a hedge against falling currencies and a slowing economy, and has a “quite substantial position in cash.”
“We’re about as defensively positioned as we could be,” the manager said. “We will pretty much stay in that position until we get better clarification” about the euro area’s crisis. Schroders has bet against the euro by holding U.S. dollars, he said.
Brown and Zangana said the European Central Bank has the capacity to solve the crisis. They also said that Germany may only allow the central bank to buy bonds “more aggressively” if the crisis worsens.
Equity markets may still rise in a contracting economy “at the first sign” that the central bank is ready to increase its bond-purchasing program, Brown said.
“One should keep their European assets powder dry,” Brown said, “ready to move in case we have a resolution. But I wouldn’t be anticipating it.”