Beware the three elephants in the room in global markets
Italy’s ailing banking sector, coupled with the country’s huge public debt; the US’ rapidly deteriorating fiscal position; and emerging markets are no longer cheap, sitting on valuations at their most expensive level since 2010
For an indication of the extent to which international investors remain bullish on Europe, look no further than the resilient euro.
Since talks on forming a three-way coalition government in Germany collapsed on November 19, the single currency has risen a further 1.4 per cent against the dollar, taking its gains versus the US dollar since mid-April to a staggering 12 per cent.
Euro-zone equities, meanwhile, are up more than 4 per cent over the past three months, buoyed by the briskest economic growth in the bloc in over six and a half years.
Yet in their enthusiasm for European assets, investors are ignoring one of three elephants in the room in financial markets: the persistent vulnerability of the euro zone’s banking sector.
Last Wednesday, the European Central Bank published its latest Financial Stability Review in which it warned that the bloc’s lenders are “riskier than their global peers” partly because of “slow progress in tackling high [non-performing loan] ratios in certain jurisdictions.”
The country that is of most concern to the ECB is Italy which accounts for roughly a third of the bloc’s nearly €1 trillion stock of bad loans.