Eurozone divided on debt

Louisa Bojesen
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THE never-ending, seemingly billion-hour tennis marathon and the World Cup have been welcome distractions to the doom and gloom in the market. As the latest record high in Greek 5-year credit default swaps indicate, investors still think there is a real possibility that Greece could default on its gargantuan national debt.

Marie Diron, an economic adviser at Ernst & Young, says that economic growth in the Eurozone will be 1-2.5 per cent lower per year than in the US over the next five years. She points out that there will be a severe impact on jobs from this woeful underperformance: while the US economy will generate more than 10m new jobs between 2010-2014, employment levels in the Eurozone will barely change.

However, how hard the next couple of years will be also greatly depends on where in Europe you happen to live. According to Diron, while southern Europe is heading for several years of very low, or even negative growth, northern Europe will benefit from strong competitiveness levels. In addition, implementing austerity plans and reducing deficits in the north will be more manageable as the starting levels are better to begin with.

Austerity does not mean that equities are done for. Karen Olney, a strategist at UBS, has looked into this in detail; she tells me that valuations support equities. Even if the recovery is muted, equities can offer good earnings growth and cash flows – something that bonds cannot. Olney expects this to continue as she doesn’t think we are going to see a double-dip recession. Instead, Olney reiterates that there are four legs to the current crisis, and we’re currently in the last leg: 1) the interbank lending freeze, 2) the fallout on the wider economy, 3) the government bailout that led to the March 2009 rally, and 4) the hangover from 3) and the realisation of how pricey the rescue was going to be for governments. Companies now look better positioned than sovereigns if we are indeed in turnaround mode, and Olney points out credit’s shortcoming is that it doesn’t share in profits growth or excess cash flow. British companies with a yield above the market’s 12-month forward dividend yield of 4.5 per cent, and which also are well covered, include AstraZeneca, BAT, British Land, Land Securities and HSBC. So it’s not all gloom after all, then.

Louisa Bojesen co-anchors European Closing Bell weekdays on CNBC.