Spain, not Greece, on the minds of many money managers

June 19, 2012

By Katya Wachtel

On Sunday, voters in Greece’s parliamentary election gave market-watchers the result they wanted.

But in the minds of many money managers, those election results are little more than a band-aid for the euro zone’s deep and complex debt problems, and their attention is focused further West. Many hedge fund managers say it is Spain – the euro zone’s fourth largest economy and the recent recipient of a 100 billion euro bank bailout – that is the real concern for the stability global financial markets.

“Greece has been off the radar screen since March as far as I am concerned,” said Robert Koenigsberger, founder and chief investment officer at $3.2 billion investment manager Gramercy. “When everyone went to bed on Sunday night, I doubt they were expecting to wake up and find that Spain would be 25 basis points wider. People probably thought there would be a risk-on trade that could give Spain some relief.”

Other U.S-based hedge funds noted that the spike in Spanish yields on Monday reflect where market participants’ real concern lies, as well as skepticism over bank bailout of that country earlier this month.

“With Spanish Yields jumping over 7% [on Monday], no-one was feeling all that positive post-Greek elections,” wrote Jack Flaherty, a fixed income manager at $47.9 billion investment firm GAM.

“What is really disconcerting is that a week ago, for Spain, they announced what they thought would appease markets and it didn’t work,” said Gramercy’s Koenigsberger.  “They treated Spain like Ireland – let’s lend money to Spain so they can put money into their banks – and now whatever benefit you got at a bank level was taken away at the sovereign level.”

“Ask Ireland how ‘bailing in’ the government to the major banking problems worked out for them?” GAM’s Jack Flaherty wrote.

For many savvy investors, the election of a conservative, pro-bailout party in Greece merely kicks the can down the road for that country, and does little to address the deep-set debt troubles of the region.

Regardless of who would take power in Greece, money managers have been preparing for another volatile summer, and as Reuter’s Jennifer Ablan reported on Monday,  market players have moved to cash in significant volume with memories of last Summer’s whipsawing markets (and the resulting portfolio losses) still fresh in their mind.

“We engaged in substantial de-risking after first quarter. Our net investment levels are pretty low right now,” said Peter Faulkner, a co-portfolio manager of credit at $2 billion P. Schoenfeld Asset Management. With cash on hand after the fund realized many investments in the first three months of the year, Faulkner and co-portfolio manager James Malley are now “rooting for an increase in volatility” believing it will create buying opportunities in the coming months.

“Carefully constructed portfolios today anticipate, and have at least partially priced in, the kinds of potential market uncertainty that we are living through,” said Todd Petzel, chief investment officer for $6 billion Offit Capital. “Shifting in and out of cash on a short term basis is not likely to be done well, or add value for long term investors.”

Meanwhile, Koenigsberger of Gramercy said the results of the Greek election did not cause the firm to make changes to its portfolio.

“This is a long-running, painful saga that will not end with the Greek elections, or the bailout of Spain,” said Eric Upin, chief investment officer at $16 billion Makena Capital Management, and former CIO of Stanford University’s endowment fund.  “Europe is not binary – it’s a soap opera. Even if Greece becomes less of a threat, it still does not remove threats posed by Italy and Spain.”

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