There are many resilient companies in continental Europe. However, without strong solidarity between European governments, Laurent Millet, European equities manager at Artemis, believes the risk of a financing crisis is real.
We are increasingly worried about the absence of a euro-wide fiscal response to coronavirus. Last week the Eurogroup failed to agree on the issuance of Eurobonds for the economic reconstruction post lock-down. This comes after the minutes of the last ECB meeting revealed that there was significant resistance to the expansion of the ECB’s asset-purchase programme.
The fiscal deficit in Italy cold be around 7% this year and total government debt could be around 150% of GDP. Government debt will be around 110% of GDP in France and Spain. Without strong solidarity between European governments, the risk of a financing crisis is real. This would put in jeopardy the banking systems in Italy and Spain. The risk premium on Italian and Spanish 5-year bonds has already spiked to respectively 208 basis point and 102 bps basis points. Political risk is sadly back in Europe.
Another negative element for equities is that government help/guarantees will not be free. More than a third of the fiscal support announced in developed economies will be in the form of credit guarantees and liquidity support. In one way or another, the governments of France, Germany and the US (among others) have in effect restricted the payment of dividends by companies that have benefitted from their support either through credit guarantees, deferral of tax and social contributions or through the use of the partial unemployment schemes. On top of banks and other financial institutions, this includes sectors like construction, industry, transport, hotels and non-food retail.
While governments and central banks have given very large guarantees on some loans, the fact remains that the debt burden of a high number of companies will be very high and potentially unsustainable. Some kind of cleansing process will have to happen or the risk of creating ‘zombie companies’ is high.
We are looking at the portfolio and are assessing which holdings would be most resilient in case of a resurgence of a sovereign crisis – and which ones would be most at risk.
We have not made any change to the portfolio since last week. We will continue to try to take advantage of the high volatility to add profitable, resilient companies and dispose of the ones most at risk in an increasingly challenging environment. The good news is that there is no shortage of these nimble, agile, resilient companies in continental Europe.
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