Fears over debt diminish despite signs of another slump

European fund managers are growing less worried about sovereign debt and the head of the European Central Bank (ECB) claims the crisis is over. However, one economic indicator heralds a return to recession for the region.

This month’s Bank of America Merrill Lynch (BofA ML) European Fund Manager Survey indicates European Union (EU) sovereign debt funding remains the biggest tail risk for asset allocators, with a net 38% citing this factor. However, this is a fall from the net 59% who expressed concern in February.

The Chinese real estate market and commodity price inflation, on the other hand, are becoming prominent risks for managers.

“It seems brutally Darwinian that in a month when Greece saw the largest sovereign restructuring in history … panellists sharply cut their view on the tail risk presented by EU sovereign debt funding,” the report says.

Global asset allocators report being a net 14% underweight to Europe in March, falling from the 20% underweight seen one month earlier. BofA ML predicts further easing in sovereign funding risk would help to reduce this underweight.

There was a slight increase in the number of fund managers expecting the eurozone to survive intact, with a net 40% saying they do not foresee any of the 17 members leaving the currency bloc. (Article continues below)

A sharp fall was also seen in the number expecting one or more members to leave the bloc during the first or second quarter of the year. However, the proportion predicting departures after 2012 rose to a net 27%.

Sentiment was bolstered by Mario Draghi, the president of the ECB, who told Bild, a German newspaper: “The worst is over, but there are also still risks. The situation is stabilising.

“Investors are regaining their trust and the ECB has not had to provide support by buying government bonds for several weeks. It is up to the governments.”

Despite confidence from asset allocators and policymakers on the sovereign debt front, data emerged last week that heightened concerns over the eurozone’s economic health.

The Markit Flash Eurozone Purchasing Managers’ Index fell to 48.7 points in March, down from the 49.3 in February and below the 50-point mark that indicates declining output.

Chris Williamson, the chief economist at Markit, suggests this means the region has fallen back into recession. Germany and France were able to avoid recession, he adds, but only by “very narrow margins”.