European markets to be weak, equities attractive: Lakefield

Taking cue from the elections in Greece and France, the European markets have shown some nervousness. The CAC as well as the DAX is down. Talking about the volatile markets, Bruno Verstrate of Lakefield Partners believes that irrespective of the political outcome, the markets will tend to be weak.

In an interview with CNBC-TV18, Bruno Verstrate said that though the euro is losing strength, equities will start to become attractive. He said, “Equities start to become quite attractive given the very low yield levels. Sooner or later there will be some picking up especially in the sectors that pay high dividends.”

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q: What do you think is the upshot in the markets, does it find support at these levels or are we going to see more uncertainty and maybe more red ticks in the stock markets?

A: At this stage, it is still early to tell how politics will evolve. The reason why Germany is going down more is because of the weak euro supporting the export sector. The political landscape has been shuffled so much that there is no more Sarkozy-Merkel at this stage, it is going to be head to head with Hollande.

The market is probably a bit nervous about how that will be evolved and how that will outline the new politics in Europe. We will continue to see this weakness but, in the end the weak euro will support the strongest export economies in Europe. I think weak euro should be beneficial in the long run.

Q: But it’s not all that weak. We are still at 1.30. Though, it is a three month low for the euro-dollar, it’s not way below that 1.31-1.32 range that it has been trading at? Do you see further weakness in the euro?

A: I think we will see further weakness because the weakest, that is Greece, suddenly had political headwinds as well to continue to work with Europe. The exit of Greece became a bit more likely today. That is definitely going to bring more weakness.

In the end, it might be part of the solution to Europe. What we think so far is that euro has been holding up extremely well but that does not serve Europe economically. If everyone tries to devaluate their currencies nothing happens. That is what has happened in the past, especially with QE in the US and the LTROs in Europe. They kind of balanced each other out.

Q: Ahead of all the uncertainty which is likely to persist in the market, given the political developments, do you expect a further sell off in the equity markets in the euro zone? Or do you think after the fall we saw on Friday and including today’s 2-2.5% cut, the markets in Europe are likely to remain at these levels?

A: In the end, equities start to become quite attractive given the very low yield levels. Sooner or later there will be some picking up, especially in the sectors that pay high dividends. I do not expect this to continue. Of course there is the economic decoupling in Europe; we will need to see how long and how far this recession is going to go.

As long as that decoupling continues to take place and the economy in Europe continues to weaken, I believe equity prices will continue to fall. In the short to medium-term, I do expect Europe to remain weak and equity price to decouple further from the western world.