Morningstar Advisor - February/March 2012 - (Page 47)

Robert Rodriguez, managing partner and chief executive officer, First Pacific Advisors (United States) Europe’s Big Issues: Fund managers say that there are a number of aspects to Europe’s credit crisis that could help or hinder recovery. Issues What Bulls Say What Bears Say Rodriguez says that the central bank’s moves are only temporary Band-Aids, which do not attack the core issue of the unfolding crisis, namely uncontrolled fiscal spending. He blames economic fundamentals in the region, such as lack of competitiveness, for these negative trends. Rodriguez, therefore, highly doubts that the necessary and very longterm fiscal austerity measures can be carried off successfully and thus believes that the current financial/fiscal maneuvering will only address short-term challenges. In his opinion, in much the same way that liquidity and swap lines were thrown at the U.S. economy during the last financial crisis, fundamental structural reforms, both fiscally and financially, have not been done. Initially, liquidity-easing measures only had a short-term positive impact in the United States, but the final cost of these actions, including nontraditional monetary policies, has not yet been totaled. He, therefore, expects that we will continue to be in an interim environment where uncertainty prevails. Rose Ouahba, fixed-income chief investment officer, Carmignac Gestion (France) Austerity Measures Fiscal discipline and restraint are necessary to reduce deficits over time. The ECB is becoming increasingly pragmatic, and if it is allowed to go further on quantitative easing, this could help Europe regain some competitiveness by weakening the euro. Banks have already reduced their exposure to government debt by a significant amount and are consistently cleaning up their balance sheets, which should result in a better outlook over the midterm. Increasing fiscal uniformity should help bring the eurozone closer to an optimal currency zone. Austerity is likely to stifle growth, thus reducing the chances of a rebound in the long run. ECB intervention has been insufficiently reactive so far. As long as the ECB’s mandate will remain focused on fighting inflation, it will lack the tools to tackle the current crisis. European banks need substantial amounts of capital, even regardless of the current crisis. Imposing additional capital requirements to back exposure to the periphery’s government bonds will, therefore, significantly damage banks’ competitiveness. European fiscal governance rules will take time to implement and will only yield benefits over the very long term. The crisis, however, requires decisions with immediate impacts. Germany’s unwillingness to allow for inflation in the eurozone by widening the ECB’s mandate is a major obstacle on the path to reform. European Central Bank Intervention Banking System Future of the Monetary Union Germany Germany’s leadership throughout the crisis has been impressive and has allowed a much-needed political consensus to emerge. Ouahba says that austerity programs (such as raising VAT) are likely to depress economic growth, precisely the wrong thing to do because slower growth will make deleveraging much more difficult in the long run. There is, therefore, a chance that the eurozone will miss its debt-reduction targets in spite of the current fiscal restraints. She says that governments should instead concentrate on measures favorable to growth, such as selling government-owned assets (privatizations) or reforming labor markets to help increase productivity. In addition, she says that Germany should use its current surplus to initiate a stimulus package meant to encourage internal demand. The reason why the current debt crisis in Europe is so complicated, Ouahba says, is the fact that the rest of the world is also growing at a slower pace than ever before, making it even more difficult for Europe to export its high-value-added goods. Yet, if both the United States and emerging markets eventually manage to avoid recession, and if the euro weakens, the eurozone should be able to regain some of its competitiveness. Ouahba also sees the ECB’s willingness to buy large amounts of public debt on the secondary market as a first step toward quantitative easing, although it would be even better if the ECB could intervene directly on the primary market. This would not require any major structural change to its mandate but would give markets a clear signal that the ECB is finally measuring up to the gravity of the situation. Finally, Ouahba says that she is convinced that concerns over the fate of the euro are overblown. The Germans are very attached to the euro, and peripheral countries such as Greece and Portugal simply cannot afford to leave the union. Johnny Debuysscher, fixed-income chief investment officer, Petercam (Belgium) Debuysscher is cautiously optimistic about the situation and says that there is some hope to see a Europe more united than in the past, as an ambitious consensus has emerged around the common goal of reducing deficits. MorningstarAdvisor.com 47 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2012

Morningstar Advisor - February/March 2012
Contents
Contributors
Letter From the Editor
Make a Difference Stories, Not Debates
How Concerned Are You About Europe?
Analytical and Independent
What to Ask When a Fund Manager Leaves
Past, Present, Future
Have Financials Gotten Cheap Enough?
Four Picks for the Present
Investment Briefs
Tactical Funds Miss Their Chance
Specialty Retail: Ad Hoc Opportunity
How Europe Is Making Its Crisis Worse
Impact on U.S. Economy Will Be Minimal
European Banks: Bargains or Value Traps?
Don’t Count the Euro Out Yet
Europe on the Brink
GoodHaven Realizes Its Vision
How Index Trading Increases Market Vulnerability
Nonlisted REITS: Handle With Care
Safety Picks for the Many Moods of Mr. Market
On the Prowl for Large- Blend Index-Beaters
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Math That Matters

Morningstar Advisor - February/March 2012