Expect action from ECB before Greek elections: Verstrate

Bruno Verstrate, CEO of Lakefield Partners, tells CNBC-TV18 that the European Central Bank could enter the market before the Greek elections so as to curb volatility. However, he doesn’t expect to see action on Greek bonds, but peripheral bonds such as Spain and Italy.

“In the end, we will see the ECB buying bonds or having another round of long-term refinancing operations (LTROs) again,” he said.

Hennecke attributes the current rally in the equities and the euro to the positive statements emerging from the G8 meet. “Secondly, there was a clear conformation that they do want to keep Greece within the EMU that must be something that had to be confirmed from a political point of view,” he added.

His advice is to buy into this rally, but be extremely selective while picking stocks. “I would avoid the insurance and the banks, but I do believe there would be clear opportunities in the strong fundamental export oriented companies,” he said.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: We had euro recover from the low of 1.264 to 1.28 without any apparent reason on Friday. The G8 meeting over the weekend threw up some positive commentary. Do you think that is the reason why European markets are doing well today or is there anything else?

A: There are two reasons why the markets are okay. Firstly, the G8 put growth back into the perspective and not only austerity that is one reason. Second reason is there was a clear conformation that they do want to keep Greece within the EMU that must be something that had to be confirmed from a political point of view.

Also the polls that come out on Greek elections, the Left and Right they seem to switch the majority lead in the polls and that determines the mood as well. I think what is important is the Greek population is clearly in favour of keep in the Euro alive and that means that they will have to keep to bear consequences of that as well.

The market’s correction last week was a bit overdone. I think the important of Greece in the economy as such is not that important but it is more a mood shifter. As long as Spain remains out of view, I think that would be much more important than what goes on in Greece.

Q: Are we done with the selling or is this pullback that we are seeing likely to be sold into?

A: I do believe that some of the companies will benefit from weaker euro, mainly the European exporters. And of course we think German stocks will be picked up sooner or later because they will clearly benefit from that weakness; they have done it in the past and they will do it in the future. They have been a victim of European basket selling so I think that will make them extremely cheap on fundamental reasons.

I do believe this is more of a buying opportunity than anything else. Of course one has to select sectors, one has to focus on export oriented companies rather than ones that import or are finance oriented. So I would still avoid the insurance and the banks, but I do believe there would be clear opportunities in the strong fundamental export oriented companies.

Q: Given the political backdrop, do you think Merkel could come on a back foot and support some things that she was averse to earlier?

A: I think she will have to for two reasons; firstly, in the elections she was clearly not awarded for the growth that was caused under here regime in Germany. On the other hand you have the French elections which have clearly indicated that growth needs to be put into the equation. So the combination of those two means that she will have to soften a little bit.

Of course the bigger question is how the ECB will react to that. In the end, we will see the ECB buying bonds or having another round of long-term refinancing operations (LTROs) again.

Q: How soon can we expect any kind of action from ECB because that will be indeed a big positive? What will be the quantum and timeline as well of what the market is expecting?

A: Volatility towards the Greek elections on June 19 will go up again and before that the market will almost force ECB to take a stance on what will happen. Not with the Greek bonds, you don’t know what happened to that, but mainly with the other peripheral bonds such as Spain and Italy. If that pressure comes up again, I think action will be taken and that might well be before June 19.