Harmonic Capital Bets on Europe as Ark Sees Euro Below Parity

  • London-based hedge fund Harmonic is long on Norway and Sweden
  • Ark says that vote outcome can’t be predicted with certainty

Amid all the gloom and doom surrounding European politics, Harmonic Capital Partners LLP has gone from being short euro to being long on the continent.

The $1.7-billion fund reckons the currency bloc won’t be under any imminent threat even if anti-euro candidate Marine Le Pen wins the French elections, and has shifted into positions in Norway and Sweden that translate “into being long Europe and long euro from a portfolio perspective,” according to Chief Investment Officer Patrik Safvenblad. The firm was short the euro until the first three weeks of January.

The prospect of a Le Pen victory, even though seen as only a tail risk, has caused the extra premium that investors seek to hold French bonds over comparable German bunds to almost double this year. The National Front candidate’s 144-point program for government includes pulling France, the bloc’s second-biggest economy, out of the euro. A victory for Le Pen “could be the start of the end” of the European Monetary Union, and the rest of the union is unlikely to survive without France, Commerzbank AG said recently.

“I am fairly relaxed on the euro zone in the short term,” London-based Safvenblad said in a phone interview. “It will be very hard to see the end of euro with a Le Pen victory. Even if it happens, it’s not going to on the day of the election."

He didn’t discuss the specific details of the fund’s investments.

Contrarian Trade

The euro has weakened almost 2 percent from this year’s high to trade at $1.0619 as of 7:07 a.m. in London on Tuesday as concerns about Le Pen mount. Leveraged funds increased their net short positions in the single currency in the week through Feb. 7.

With many investors short on the single currency, the response to unexpected growth in the euro area or any spillover from U.S. fiscal stimulus onto the continent would cause the euro to strengthen “quite quickly,” Safvenblad said.

Still, Harmonic’s outlook on the single currency isn’t the consensus call. The currency will drop to $1.0500 by the end the year, according to the median forecast of analysts in a Bloomberg survey.

Dubai-based hedge fund Ark Capital Management is, for instance, short the euro and expects the currency to trade below parity if Le Pen emerges victorious.

"The polls show that Le Pen has a low chance of electoral success, but I think post-Brexit and the U.S. elections, we know that we can’t be 100 percent certain of the outcomes,” said Saed Abukarsh, co-founder and chief portfolio manager. “As such in the absence of another story, euro should remain compressed against most other pairs.”

The fund, which assigns a 30 percent of chance of a euro-zone breakup if Le Pen wins the elections, is short the euro versus the dollar, sterling as well as the Australian and the Canadian currencies.

— With assistance by David Goodman

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE