Europe has been waiting with bated breath for the Greek election results. With three-quarters of the votes counted, the anti-austerity party Syriza is on course to win. It has taken 149 seats so far, leaving it just two short of an outright majority.
The peripheral economies - Spain, Portugal, Ireland and Italy - have been watching the debate with keen eyes. If Syriza manages to negotiate any concessions for Greece, these countries could begin shouting about the tough austerity deals they got from the Troika.
The outlook makes for interesting analysis for UK pension schemes, particularly when considered alongside the European Central Bank's (ECB) quantitative easing (QE) policy (PP Online, 23 January). Barnett Waddingham partner Matt Tickle says: "My view on QE in Europe is that by itself it doesn't do very much. It has an impact on markets as we've seen, but I don't think it fundamentally solves many of the problems that Europe has. That needs to come from the structural and fiscal side."
Hermes group chief economist Neil Williams takes a similar view. He says: "Greece's election was an untimely curve ball but reminds us that while QE may address one of the symptoms of the Eurozone crisis - deflation - it's more reform that will be needed to solve the underlying problem." This is a monetary union devoid of economic union, Williams adds.
Tickle says the Greek election is an early test of how serious Europe is about solving its structural problems. "And that's something that's only going to play out over the next couple of months or so." ECB QE has pushed down yields across Europe's sovereign bonds, which has had a knock-on effect on gilt yields. "That's clearly had a huge impact on pension scheme funding," he says.
Syriza's victory will be seen as a rebuff to "conventional Europe", according Buck Consultants chief investment officer Simon Hill. Negotiations will be difficult in the short term, promoting volatility across a range of asset classes, including currency. "Schemes should be looking at their currency hedging by both their underlying investment managers and any hedging they put in over the top of that, and whether it meets their strategic needs in terms of reducing the impact of currency volatility," Hill says.
He adds: "A lot of scheme assets are going to be domiciled in the UK; British debt securities, or sterling. And also, in terms of equities, there's kind of a natural hedge regardless of where they are domiciled. Those companies managing their own currency exposures don't necessarily suffer if sterling is strong. One would expect there to be some strengthening of sterling relative to the euro, but a lot of that has already taken place."
Tickle agrees there will be more volatility in currency markets. "For UK schemes, it's probably a bit of a mixed bag because sterling strengthened a lot last year, primarily on the expectation that the Bank of England might move before the Fed. Since then, sterling has been broadly flat in that it's weakened against the dollar, but strengthened a lot against the euro and the yen.
"Some schemes and some managers are looking to use that as a source of profit - taking a view on central bank policy. A reasonable place to play it is through currency markets because they remain far more liquid than bond markets, which is the other traditional way of playing this. But then equally, if you haven't got a view, make sure you're hedging your currency risk appropriately as well."
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