You are here: Home   Newsroom   The Draghi Artist

The Draghi Artist

This time of the year is when many a fund manager comes knocking on the door with tales of how they are going to perform in the next 12 months. Yes folks, it's the investment roadshow time of year. However, there is a happier feel to the start of this year than many of the last 5 or 6. Central to the cheerier disposition of many fund management groups is a remarkable turnaround in the European Central Bank (ECB).

Leading observers have argued that Jean-Claude Trichet's retirement and his succession as president of the ECB by Mario Draghi, is the most important event for markets since Hank Paulson's 'TARP' bailed out the American banks in 2009. Importantly though, Draghi has done precisely what Trichet failed to; he has faced up to the market's greatest fear and given this a sharp jab in the eye with his finger! The monster, of course, has been that the disintegration of the euro would cause a collapse of European banking, giving us a repeat of Lehmans, but maybe 50 or 100 times over.

In its pre-Christmas, Long Term Refinancing Operation (LTRO), Draghi's ECB said not only does it realise that this is the greatest fear and risk in global finance, but also that it is prepared to bring out the heavy artillery to deal with it. No one is pretending that this is, in any shape or form, a solution to the Eurozone problem, instead, what it does is to buy time.

In essence, it means that the European banking system has liquidity and solvency for the next three years, during which time the problem governments have a window of opportunity to prove to the world that they have credible plans to put their houses in order. The LTRO is increasingly being referred to as a 'game changer', a description with which many fund managers agree.

For the first time, since the middle of last year,markets have a scenario for Europe that does not necessitate a massive crisis. It is unlikely that Greeceor Portugal will last the course this year, but the new, glass half full mood, means that markets are now looking to this as the trigger that will prove that the Eurozone will stand stronger as a 15 or 16 member entity than it does in its current incarnation.

If investors can take the European meltdown out of the equation just for a moment, we are left with the rest of the world (with the exception of theUK), looking in really quite sound health. TheUS recovery is showing every sign of having real traction at last, with higher levels of construction activity starting to feed through to job creation. Inflation is peaking globally and the two major emerging markets of China and India are starting to ease monetary policy in response to this. The excessive pessimism of the past six or seven months has driven valuations to levels whereby it will take (and is taking) only a small change in sentiment for the better to make a recovery in equity markets appear to be remarkably soundly underpinned.

This is despite an increasingly bleak outlook for the UK. The pressure on the banks to build higher capital ratios and their willingness to do just that is resulting in a shrinking money supply; if we combine this with every other headwind in the economy, investors should not be in the least surprised that the domestic economy appears to be in recession again. Unless something happens to change the behaviour of the high street banks to mortgage and commercial credit, then it is feared that the recession will deepen and theUK's trophy AAA status will go the same way as the USA, France and Austria.

We have, therefore, a picture whereby financial markets are set for a much better year despite the worsening outlook for the domestic UK economy. For this, it would seem, investors should have to thank an Italian banker named Mario Draghi.