European sovereign debt crisis: Back in black

The sovereign debt crisis has left many investors feeling emerging markets are a better bet than Europe. Chris Panteli discovers why some fund managers believe this is no longer the case

European equity trades increased by more than 30% between the first quarter of 2010 and the first quarter of 2011, suggesting a recovery in the market is well underway.

The number of trades rose 32% from 51.9m to 77.8m between 2010 and March 2011, according to pan-European exchange provider Chi-X Europe. Trades executed also jumped up 24% in the first quarter of this year on the previous quarter alone.

The latest results indicate a strong recovery in the European equities market, as shares worth over €454bn ($656.5bn) were traded on Chi-X in Q1 of 2011. In the first quarter of last year, shares traded were to the value of €367.5bn, showing an increase of 24% into 2011. An equivalent increase took place between the final quarter of 2010 and the first of 2011.

The figures appear to support the belief held by many fund managers specialising in the region that while restructuring and defaults were still likely in some of Europe’s peripheral countries, it will not be enough to upset the recovery in core European markets.

This is despite the ongoing sovereign debt crisis which began when Greece requested a European Union and International Monetary Fund bailout a year ago.

Just last month, the yield on Irish, Greek, Portuguese and Spanish government bonds all increased, with the yield on Greece’s two-year bonds surging to a record high of 19.4%. Meanwhile, Ireland suffered a further blow to its beleaguered banking sector when Moody’s cut its ratings on the country’s government-guaranteed banks to junk status.

Tough negotiations
At the time of writing, Portugal was attempting to reach an agreement on a $78bn three-year loan negotiated by caretaker Prime Minister Jose Socrates with the EU and IMF. The deal needs cross-party support following the collapse of Socrates’ government in April.

Under the terms offered, Portugal will be given more time to reach its budget deficit targets than had previously been expected. This year’s target has been raised to 5.9% of GDP from 4.6%. The deficit must then be cut to 4.5% of GDP in 2012 and 3% in 2013.

Portugal must agree to the terms of the loan by June 15, when Lisbon must redeem €4.9bn of bonds.

Despite the recovery in some sectors, fund managers believe the ongoing sovereign debt concerns are misleading investors about the growth prospects for Europe, as institutional investors continue to shun small and medium sized European equities.