Will Funds Return to Europe?

Chidem Kurdas

In a way it’s a chicken-and-egg story. Fund managers wait to see if others are moving money to Europe. So everybody is inclined to wait, leaving in limbo the success of today’s attempt by policymakers to end the European debt crisis by providing capital directly to banks.

Investors’ flight from the Euro zone endangered not only Greece and other smaller economies but also Spain and Italy. Larry Kantor, Barclays head of research investors, says the massive pullout from Europe by skeptical investors crated tough financing conditions, which tipped the periphery into recession. This pullout, not austerity measures, caused the recession, Mr. Kantor argued last week.

It is sign of a severe problem when even hedge funds, the risk capital, get out of a market. As the crisis intensified this year, funds bought very few European assets and only those that have global businesses, such as pharmaceuticals and consumer products.

Thus Citadel held Ireland-headquartered Amarin Corp., whose bio-pharmaceuticals sell internationally, and Spain’s Banco Santander, which has extensive Latin American businesses. Paulson & Co. held Grifols SA, a Spanish pharmaceutical and medical product company. Traxis Partners  favored Unilever, the British–Dutch consumer goods maker with global reach. These were small positions.

If the new policies ease financing and hence lift economic activity, funds will find a greater number of attractive European companies and invest more, but that can take a while.

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