Bearish on Euro mkt; watch out for ECB action: Lakefield

As the eurozone's debt crisis escalates and anti-austerity demonstrators protest on the roads of Germany and Spain, European equities witnessed some volatility. Bruno Verstrate, CEO of Lakefield Partners said they are very bearish about the European market at the moment. It is now time to watch out for the budgets presented by France and Spain, he added. Moreover, he also feels that this kind of a situation will test the strength of the ECB as well.

Also read: See tough environment for global markets ahead: StanChart

Here is the edited transcript of the interview on CNBC-TV18.

Q: Yesterday Europe was on top of the mind with all those protests in Greece and Spain. Do you see that hurting the reform process, the austerity measures? Could that be one of the tail risks that the ECB or even the government cannot remove?

A: I think eventually democracy will decide in which direction this will go in the end. It is a necessity and we knew that social unrest will slowdown the process of sanitizing the state budget. But, of course after it has been implemented there is always election looming and that could change the parties which are in power and could bring us to a more extreme situation whereby the solidarity of Europe reaches its limit. That's a danger for European unification. Instead of unifying it could float further and further away from the other.

Q: Does it get that bad that so far when push comes to shove, even with a much bigger problem in Greece, the country and its people even though with a lot of dissatisfaction did stay with the euro. Do you think Spain could go that far?

A: It can. We do not even need to look at Spain. If you look at Germany for example, Merkel has done a tremendous job. But, in the polls, it looks like she is not going to be re-elected anymore. It doesn’t need to be in a country where austerity takes place but, it can also happen in a country that contributes to weaker countries.

I think that is the bigger danger. Of course, one knows that there needs to be savings until of course it hits their own budget, it doesn't affect them but now it seems to affect everyone. It is slowing down the economy. On top of that you basically earn less. That is of course creating a friction period. One needs to go through it, one gets used to that but, before you get used to that, I think there will be a lot of protests on the street.

Q: What are you watching out in Europe? At what point would you start perhaps selling into this rally, how do you read the events?

A: We are very bearish, we are not selling, we are already sold at this moment mainly because of the global economic context. Not just because of Europe but, I think what one should look at primarily is the elections and of course the budgets. I think in the short-term, the budget that will be presented by France and Spain are clearly going to indicate in which direction the southern countries as well as the bigger countries such as France will go.

I think it will test the strength of the ECB at this stage, how this will work and it is going to show how much these strong countries are willing to contribute. I think it is a first market test, for example Spain asking for help, how will it work in practice, how far will they go, will Italy follow? Those are questions that are out there and that might be answered in the coming months.