European leaders meeting this week are unlikely to revive market confidence because any measures announced won’t spur economic growth, the head of Prudential Plc’s Portfolio Management Group said.
“I doubt there is going to be a solution that causes markets to rally big time,” John Betteridge, who helps oversee 138 billion pounds ($215 billion) of assets as director of investments in London, said in an interview Dec. 2. Markets will be highly volatile “for some considerable time,” he said.
European officials led by German Chancellor Angela Merkel and French President Nicolas Sarkozy will attempt to hammer out a rescue plan this week that may forge closer economic ties while mandating penalties for countries that breach budget rules. Stocks rose, extending the biggest weekly advance since March 2009, and European government bond risk dropped to the lowest levels in a month.
The market is being driven by news flow which “makes it difficult to call,” Betteridge said. “Valuations have gone completely out of the window, are not important at all in determining what market behavior is.”
Investors withdrew $1.7 billion from global stock funds in the week to Nov. 30, the fourth consecutive week of outflows, Citigroup Inc. said on Friday. Prudential, which runs the U.K.’s largest with-profits fund, closed its long position in global equities in July and began to buy shares again in October.
The inability of Sarkozy and Merkel to lead Europe out of the crisis has drawn rebukes from U.S. President Barack Obama, Treasury Secretary Timothy F. Geithner and European Central Bank President Mario Draghi. The leaders of Europe’s two biggest economies are meeting in Paris today.
Betteridge said he’s less confident the euro can survive the current crisis after Merkel and Sarkozy said on Nov. 2 they had discussed a Greek exit from the currency union. The single currency has fallen 2.2% against the dollar since then.
“That was an extraordinary admission. To say that in an open forum was bizarre,” Betteridge said. The break-up of the euro-zone would be the worst possible outcome from the current crisis as it would lead to “a significant hit to growth in the euro-zone for countries that stay as well as those that leave,” Betteridge said.
The majority of chief economists at the world’s leading international banks think a breakup of the euro is possible, Financial Times Deutschland reported yesterday.
A breakup would be accompanied by social unrest and would cause “significant damage” to the rest of the world economy, Betteridge said. Markets “will have lost patience” unless politicians come up with a solution that restores confidence in the next 12 months.
Euro-area finance ministers gave approval for work on a plan to recycle national central bank funds through the International Monetary Fund at a meeting last week, two people familiar with the negotiations said on Dec. 2.
Italy and Spain need to refinance more than 420 billion euros of bonds that come due next year, Bloomberg data shows. Lombard Street Research Ltd.’s Jamie Dannhauser estimates euro area banks have 600 billion euros of term debt due to mature in 2012, 35 percent higher than their gross issuance in 2011.
Peripheral countries and peripheral banking systems have to raise money in 2012 and that won’t happen “if there is as much uncertainty as there is now,” Betteridge said.
Italy auctioned securities at an average yield of 7.56 percent on Nov. 29, up from 6.06 percent at the last sale in October while Spain paid 5.544 percent, the most in at least 6 years, to borrow for five years on Dec. 1.
Europe and the markets will be in a better place in a year’s time, “it might have got worse in the meantime,” Betteridge said.