Short France?


Author Cam Hui

Posted: 16 Apr 2013

I have found that the best trades are ones based on a well-defined fundamental reason combined with a market catalyst. Investors who put on a trade based purely on fundamentals run the risk of being early – and Value investors are a classic example of this tendency. Fundamentals have a way of not mattering to the market until it matters. A much better way to position your portfolio is to wait for the market catalyst by watching the technical conditions of the trade.

A bearish call on France
Consider this article from Charles Gave of Gavekal (via ZeroHedge): France Is On The Brink of A Secondary Depression:

France is engulfed by a political, economic and moral paralysis. The president has record low popularity, unemployment is making new highs and the tax czar of a supposedly left wing government just quit after repeatedly lying about a pile of cash he had stashed in a Swiss bank account. From such a sorry state of affairs, you might think that things could only get only get better. Unfortunately, economic cycles do not work this way and it is my contention that France is about to enter what was known during the gold standard era as a “secondary depression.” The rigid design of the euro system means the whole eurozone is prone to the kind of brutal cyclical adjustments seen in that hard money era of the 19th and early 20th centuries. But having reached the logical limits of its decades long experiment in state-run welfare-capitalism France is far more exposed than even its struggling neighbors.

The article is well worth reading in its entirety, because it lays out the bearish divergence for France against the rest of Europe. There is a French elephant in the eurozone room that no one dares to speak about. While Brussels can manage crisis after crisis in peripheral countries, a blowup in France is too big to contain as the French-German relationship lies at the political heart of the European Union.

Hale Stewart at the Bonddad Blog jumped on the same theme last week when he wrote:

The French ETF is looking more and more like a great short opportunity. As I first noted a little over a week ago, the French economy is in terrible shape: GDP has barely grown for the last 7 quarters, unemployment is rising, industrial production is dropping and the budget and current account deficits are increasing.

Too early to short France
What has been described so far is best characterized as a “trade setup”. This is a trade with a strong fundamental backdrop. My inner investor tells me to be wary of France and its effects on Europe, but my inner trader tells me, “Not yet.”

These fundamentals have a way of not mattering to the market until it matters. Right now, the market is shrugging off the warning signs. Consider this chart of the relative performance of French equities to eurozone equities below. Relative support seems to have held despite the potential negative news and the CAC is actually rally on a relative basis in the short term.

This may be a case of when it rains, it pours, but you have to wait for the rain. The “rain” to which I refer to is the emergence of a risk-off trade. Right now, there is no sign of that happening. Look at the relative strength of Greek stock to eurozone stocks – it’s signaling a risk-on market.

The same could be said of Italy. Look at the relative performance of the MIB against the Euro STOXX 50:

In short, this is a trade setup to be watched. Watch how the fundamentals develop, because you have the time. Should the technicals deteriorate, then you have a great trade with tremendous upside potential – but not today.

Later this week, I will write about another potential trade setup in a hot topic – gold.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.  

You just don’t understand Europe…


Author Cam Hui

Posted: 29 Mar 2013

In the wake of the disappointing market reaction to the Cyprus deal, I just want to repeat the comment I hear from some of my European contacts: “You just don’t understand Europe.”

Don’t be fooled by the theatre
Europeans elites do their deals behind closed doors and what we see in the headlines is mostly theatre. By contrast, Americans focus much more on process and headlines – and that’s where they go off the tracks when analyzing the eurozone crisis. That’s why we get alarmist comments, like John Mauldin’s Thoughts from the Frontline: You can’t be serious in which he worried about the precedences set by the Cyprus deal and the effects on European banks:

Basel III standards require European banks to increase their deposit ratios. This European response to Cyprus is going to make that harder for banks in smaller European countries to accomplish. Very tiny Luxembourg has banking assets 13 times the country’s GDP. Yes, I know that Luxembourg’s banks are the very epitome of solid banking and that the majority of those assets are loans to central banks and other credit institutions, but there is no way on God’s green earth that Luxembourg as a country could even begin to think about backing its banks. Of course, everyone knew that before this crisis, but if you are the treasurer of a large corporation, how soundly do you sleep at night after Cyprus? And God forbid you have an account in one of the peripheral countries. In the case of Ireland, the lesson was that the money would be found to back the banks, even if taxpayers suffered. But now? New rules for new times. And then you open The Financial Tim es this weekend and read (emphasis mine):

The chairman of the group of eurozone finance ministers warned that the bailout marked a watershed in how the eurozone dealt with failing banks, with European leaders now committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors.

Jeroen Dijsselbloem, president of the eurogroup, was speaking after Cyprus reached its 11th-hour bailout deal with international lenders that avoids a controversial levy on bank accounts but will force large losses on big deposits in the island’s top two lenders.

By contrast, I was recently relatively sanguine about Cyprus (see Don’t get too excited about Cyprus and More of the usual Eurocrisis drama). I wrote that a Cypriot solution is specific to Cyprus:

I believe that bailouts of other eurozone countries, should they be necessary, will conform to a different template of conditionality other than the imposition of a tax on bank deposits. For example, the ECB has made it clear that it will backstop Spain, but on condition that the government undertake structural reforms and austerity. In the case of Spain, Rajoy has yet to swallow the bitter pill that comes with an OMT bailout.

Don’t forget Draghi’s Grand Plan
To explain, the real agenda of the European elites consists of three components:

  1. Push for structural reform long term;
  2. Austerity in the short-term; and
  3. The ECB stands by to hold everything together if the above two steps are taken.

Mario Draghi revealed this Grand Plan in February 2012 (see Mario Draghi reveals the Grand Plan) in a WSJ interview. Here are the key quotes from that interview [emphasis added]:

WSJ: Which do you think are the most important structural reforms?

Draghi: In Europe first is the product and services markets reform. And the second is the labour market reform which takes different shapes in different countries. In some of them one has to make labour markets more flexible and also fairer than they are today. In these countries there is a dual labour market: highly flexible for the young part of the population where labour contracts are three-month, six-month contracts that may be renewed for years. The same labour market is highly inflexible for the protected part of the population where salaries follow seniority rather than productivity. In a sense labour markets at the present time are unfair in such a setting because they put all the weight of flexibility on the young part of the population.

He went on to say that the European social model was dead:

WSJ: Do you think Europe will become less of the social model that has defined it?

Draghi: The European social model has already gone when we see the youth unemployment rates prevailing in some countries. These reforms are necessary to increase employment, especially youth employment, and therefore expenditure and consumption.

WSJ: Job for life…

Draghi: You know there was a time when (economist) Rudi Dornbusch used to say that the Europeans are so rich they can afford to pay everybody for not working. That’s gone.

Unlike Dijsselbloem, who is a rookie, Draghi is an experienced central banker who chooses his words carefully and he reveal his agenda in February 2012. Investors looking at Europe should remember that.

If you understand the Draghi Grand Plan, then you will understand how the eurocrats are likely to react when the next sovereign crisis occurs. First, the ECB will “do whatever it takes” to save the eurozone, but help from Frankfurt (the ECB) and Brussels (EU) comes with strings. In all likelihood, the eurocrats will believe that the country seeking help needs austerity and structural reform. In such a case, be the price to be paid will be paid is austerity and structural reform and the solution will not to stiff bank depositors (think Spain as an example as Rajoy’s reluctance to embrace Draghi’s “conditionality”).

The kind of “conditionality” demanded by the ECB and is therefore highly situation specific. Cyprus was truly a unique case. Don’t expect the same template to be used for Spain or Portugal. That’s where outsiders make the mistake.

Investment implicationsLast week, I wrote that I was watching the relative returns of Greek stocks to eurozone stocks as a barometer of the level of stress in Europe, largely because of the Greek-Cypriot link and because Greece is the high beta play in Europe. When I looked last night, GREK had tanked relative to FEZ and had violated an important level of relative support.

The Athens Index had also dived relative to eurozone stocks. Though the degree of relative performance was not as bad, it is nevertheless a cautionary signal for the risk trade in Europe.

The French elephant in the room
The negative market reaction over Cyprus suggests to me that we are going to go through a “the glass is half empty” cycle in Europe and traders should be prepared accordingly. The key indicators to watch is the performance of France. France is the elephant in the room. The French economy is suffering a negative divergence with Germany. Consider this graph of French and German PMI (via Business Insider).

The eurocrats can deal with Italy, Spain and Ireland, but France is at the core of the EU and impossible to save. The Economist described France as the time bomb at the heart of Europe:

European governments that have undertaken big reforms have done so because there was a deep sense of crisis, because voters believed there was no alternative and because political leaders had the conviction that change was unavoidable. None of this describes Mr Hollande or France. During the election campaign, Mr Hollande barely mentioned the need for business-friendly reform, focusing instead on ending austerity. His Socialist Party remains unmodernised and hostile to capitalism: since he began to warn about France’s competitiveness, his approval rating has plunged. Worse, France is aiming at a moving target. All euro-zone countries are making structural reforms, and mostly faster and more extensively than France is doing (see article). The IMF recently warned that France risks being left behind by Italy and Spain.

At stake is not just the future of France, but that of the euro. Mr Hollande has correctly badgered Angela Merkel for pushing austerity too hard. But he has hidden behind his napkin when it comes to the political integration needed to solve the euro crisis. There has to be greater European-level control over national economic policies. France has reluctantly ratified the recent fiscal compact, which gives Brussels extra budgetary powers. But neither the elite nor the voters are yet prepared to transfer more sovereignty, just as they are unprepared for deep structural reforms. While most countries discuss how much sovereignty they will have to give up, France is resolutely avoiding any debate on the future of Europe. Mr Hollande was badly burned in 2005 when voters rejected the EU constitutional treaty after his party split down the middle. A repeat of that would pitch the single currency into chaos.

The lines in the sand
I am watching closely this ratio of the CAC 40 to Euro STOXX 60 to see which way it breaks out of the relative consolidation range.

If it rallies through upside relative resistance, then any crisis is just more theatre and can be regarded as a buying. On the other hand, if it breaks to the downside, there’s going to be trouble.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

An uncomfortable bull


Author Cam Hui

Posted: 25 Mar 2013

I suppose that I should be happy. I correctly turned bullish on a tactical basis (see Give in to the Dark Side). I correctly called the Cyprus mini-crisis (see Don’t get too excited about Cyprus and More of the usual Eurocrisis drama). As I write these words, the news of the Cyprus deal is sparking a modest risk-on rally.

Over here on this side of the Atlantic, the American economy continues to chug along, despite the sequester and payroll tax hike. I agree with Tim Duy when he writes that the recovery is real.

Sector performance signal caution
When I reviewed my charts on the weekend, I came away vaguely dissatisfied. The relative performance of industries and sectors reveal a market whose leadership that is increasingly turning away from cyclical groups and toward defensive sectors and a “negative beta” group.

If we are seeing such a bullish outlook (Europe, US economy), why are cyclically sensitive sectors not doing better. Consider the relative performance of Consumer Discretionary stocks against the market. This sector is currently seeing a sideways consolidation after stalling out of a relative uptrend that began last August.

Industrials are also displaying a similar pattern as Consumer Discretionary stocks: Stalling out of a relative uptrend followed by sideways consolidation:

The same could be said of homebuilding stocks:

The only cyclically sensitive group that I could find that is still in a relative uptrend against the market are the transportation stocks, which is a relatively narrow group:

Defensive sectors taking the lead
On the other hand, defensive sectors are starting to take the leadership position. Why are they outperforming when the stock market is advancing?

Consider, as an example, the relative performance of Consumer Staples, which is staging a relative strength rally:

Health Care, another sector thought to be defensive in nature, is already in a shallow, but well-defined relative uptrend after staging an upside breakout through relative resistance:

Utilities are forming a relative saucer bottom against the market:

Golds: The negative beta play
What’s more, gold stocks are showing signs of revival. The Amex Gold Bugs Index has rallied through a relative downtrend line against the market, though the longer term relative downtrend (dotted line) remains intact:

HUI has already staged a relative turnaround against bullion as it has strengthened through the relative downtrend against gold.

Gold and gold stocks have somewhat defensive characteristics as they have had a zero or negative correlation against the SPX in recent weeks. Their revival could be a warning sign for stock bulls.

Be very, very careful out there
As I wrote in my recent post Give in to the Dark Side, my inner investor was already skeptical about this most recent rally:

My inner investor continues to be concerned about this market advance. He believes that the prudent course of action would be to move his portfolio asset allocation to its policy weight, i.e. if the policy weight is 60% stocks and 40% bonds, then the portfolio should be at 60/40.

At the time, my inner trader wanted to throw caution to the winds and get long the market. Now, my inner investor is telling him, “I told you so.” Under these circumstances, my inner trader is getting very, very nervous and he is tightening up his trailing stops. The behavior of these sectors is flashing warning signals that if even if this market were to rally further, the advance could be very choppy.

Until we see some evidence of upside relative breakouts of consolidation ranges in cyclical sectors and industries, these market internals should make anyone who is bullish an uncomfortable bull.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned. 

More of the usual Eurocrisis drama


Author Cam Hui

Posted: 22 Mar 2013

So the Cypriot parliament has rejected the terms of the Troika’s rescue deal. Their finance minister is in Moscow and there were stories floating about that the quid pro quo for a Russian rescue of Cyprus would be a Russian naval base (via Business Insider). Should the EU and NATO be concerned?

I don’t think so. The Russians had a chance to expand their geopolitical footprint in November but they passed. Here is what I wrote back then (see Europe dodges another bullet (Not the Catalan election)) [emphasis added]:

The wild card that I had been watching for is for Greece to turn to Russia instead of the Troika for financing. What if the Greeks got tired of the pain and turned to Putin for relief? Moscow has long had a historical desires for the warm waters of the Mediterranean for centuries. A financing deal could have shook up NATO and significantly shifted the geopolitical balance in the Eastern Med.

The test case was Cyprus. Russian nationals have a large presence on that island. As its banks got into trouble because they were stuffed full of Greek debt, the Cyprus economy was in peril. As the New York Times reported in June:

The Russian government last year gave Cyprus a three-year loan of 2.5 billion euros, or $3.1 billion at the current exchange rate, at a below-market rate of 4.5 percent to help it service its debt. Cyprus now needs at least 1.8 billion euros, or $2.3 billion, by the end of this month to buttress its ailing banking sector.

Instead of turning to the EU, they turned to Russia [emphasis added]:

Now many on this tiny island nation, whose banks and government are facing economic insolvency, are hoping for financial salvation from Russia rather than Germany and the European Union.

“I would much rather be saved by Moscow,” said Elena Tsolia, 30, an attendant at the department store Debenhams, where Russian shoppers snap up bottles of Dior and Chanel perfume. “We are a small island and we don’t want to be owned by Germany.”

I speculated that Russia could have not only rescued Cyprus, but Greece in return for naval basing rights:

Cyprus would have been the test case of Russia flexing its financial and geopolitical muscle in the Eastern Med.

Today Nicosia, tomorrow Athens? Can you say “Russian Black Sea fleet base in Athens, or Crete”?

So what happened? Cyprus turned back to the Troika instead of Moscow:

A little noticed announcement came across my desk. The headline was CYPRUS Government – Troika reach agreement:

The Government of the Republic of Cyprus informed on the 25th of June 2012 the appropriate European Authorities of its decision to submit to euro area Member States a request of financial assistance from the EFSF/ESM.

Any talk of a rescue from Moscow is likely just that – talk. The Russians demonstrated their lack of interest in November when they had the chance.

Cypriot crisis tripwires
Here is what I am watching for as signs that the markets believe that the Cyprus crisis is getting out of hand. The chart below shows the relative return of the ETF of Greek stocks (GREK) against large cap eurozone stocks (FEZ). The GREK/FEZ ratio has declined and it is testing a relative support zone. Should it break support, then it’s time to get more cautious.

I use this ratio for two reasons. Cypriot banks are highly exposed to Greek debt. As well, the Greek stock market is the high beta “canary in the coalmine” of risk in the eurozone.

Looking at a similar ratio of the Athens Index to the Euro STOXX 50, it gives me further comfort that the market isn’t overly concerned about the Cyprus situation. This ratio isn’t even testing the relative support level yet:

So take a deep breath and relax. The headlines represent the usual European negotiation drama in a crisis, with one or both sides leaking stories of catastrophe should there be no agreement.

On the other hand, the message from the markets is that this crisis will be resolve in a relatively benign manner. Listen to the markets. Calm down.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Will Cyprus spark a turnaround in metals and mining?


Author Cam Hui

Posted: 19 Mar 2013

The blogosphere is full of comments about the Cypriot bailout on the weekend (for examples, see How to start a banking crisis, Cyprus edition and The Cyprus conspiracy II). Instead of writing about Cyprus, a topic that I have no special expertise in, I thought that it would be timely to write an update to my blog post on February 19 about the resource-based sectors (see Time to buy gold and commodity stocks?).

Since I wrote that post, the metals and mining stocks have begun to stage a turnaround. To recap, the mining group is showing signs of being overly beaten up and washed out. This chart of XME, the mining ETF, against the market shows that it is trading at or near investor capitulation levels relative to its long-term history.

Take a look at the shorter term one-year relative chart of XME vs. SPY. The miners are starting to show some positive relative strength against SPY. Is that the sign of a nascent recovery?

Similarly, gold stocks are highly unloved against bullion. I have not been a big fan of buying gold stocks for gold bulls (see Where is the leverage to gold?), but in this case a long gold stock/short bullion position is likely to have much better risk/return profile than any time in the recent past.

Shorter term, however, my inner trader is still watching this pair of a relative turnaround as the HUI/Gold pair remains in a relative downtrend.

On the other hand, I can’t say I am overly bullish on gold itself. The silver/gold ratio, which is a measure of the speculative interest in precious metals, is stuck in the middle of its historical band indicating neither excessive bullishness nor excessive bearishness on the PM complex.

Nevertheless, I am seeing signs of a capitulation, or washout, in investor sentiment. Here in Canada, the chart of the junior Venture Exchange Index against the more senior TSX Index shows that the ratio is at or near levels indicating investor capitulation in the juniors, which are mostly junior resource companies.

Not enough energy in Energy?
In my last post on this topic, I was more constructive on the energy sector as the sector was showing signs of a relative strength turnaround. Since then, the sector remains range-bound against the market and appears to be consolidating sideways on a relative basis.

The price of Brent crude confirms my observation about the range bound, or sideways consolidation pattern shown by energy stocks.

At this point in time, the energy sector may not have enough energy, or momentum, to present itself as the new emerging leadership sector.

As I write these word, the markets have a risk-off reaction over the Cyprus news. EUR is plummeting against all currencies and against JPY in particular; USD is up: ES is falling and gold is up marginally but a base metal like copper is down. While the initial market reaction isn’t necessary the sustainable reaction, the Cypriot event may serve as a catalyst for the resource sectors (and the metals in particular) to stage a turnaround and present themselves as the new market leadership. It will also prove to be an important market test for the price of gold (and the gold bugs), to see whether investors flock to USD assets or to gold in this instance of an unexpected eurozone confiscation tax of banking depositor assets.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Don’t get too excited about Cyprus


Author Cam Hui

Posted: 19 Mar 2013

The financial markets sold off early Monday on the news of the weekend bailout of Cyprus, but while the risks of a financial meltdown, while real, they are overly exaggerated. As I write these words, US equities have recovered most of their losses and shrugged off the Cyprus news.

What happened?
To explain what happened, Cypriot banks got in over the heads with too much Greek debt and had to be rescued. The EU stepped in with a €10 billion rescue package, but with the conditionality that the government impose a 6.75% one-time levy on bank deposits under €100,000 and 10% for deposits over €100,000. The deal has yet to be ratified by the Cypriot parliament. If it isn’t, banks in Cyprus are certain to collapse and there are reports about how the deal is going to get modified.

The knee-jerk reaction was instantly negative. The fear is that if this can happen in Cyprus, it could happen elsewhere. What if Portugal, Spain or Ireland had to get bailed out, would depositor funds be at risk there too? What’s to stop the Portuguese, Spanish and Irish from pulling their euros out of their banks and putting into Deutschebank in Frankfurt, thus sparking an enormous bank run and threatening the health of the European banking system?

Bank run fears are overblown
I believe that any panic over a possible bank run in the eurozone is exaggerated. Wolfgang Münchau (see Europe is risking a bank run in the FT) highlighted the risks of a bank run but admitted that there are institutional barriers to a bank run on retail deposits:

There are some institutional impediments against bank runs within the eurozone. Some countries impose daily withdrawal limits, ostensibly as a measure against money laundering. Nor is it easy to open a bank account in a foreign country. In many cases, you need to have residency. You may need to travel there in person, and you need to speak the local language – or at least English.

While it is possible to get around these rules, the risks of a bank run that threatens the health of the banking system are low.

In addition, ECB head Mario Draghi has said in the past that he would do “whatever it takes” to save the eurozone. However, he has also made it clear that rescues come at a price. The Cypriot rescue conforms with the EU and ECB principle of the imposition of “conditionality” on rescues. In the case of Cyprus, the banks had insufficient equity to withstand the shock of a write-down of Greek debt and it didn’t have enough senior bond holders to cushion the pain without rendering the banking system insolvent. The only ones left to take the hit were the depositors. It didn’t hurt politically that Cyprus was known as an offshore banking haven, mainly for Russian oligarchs. So it was easy for Angela Merkel to sell a bailout involving shared pain to the German people.

I believe that bailouts of other eurozone countries, should they be necessary, will conform to a different template of conditionality other than the imposition of a tax on bank deposits. For example, the ECB has made it clear that it will backstop Spain, but on condition that the government undertake structural reforms and austerity. In the case of Spain, Rajoy has yet to swallow the bitter pill that comes with an OMT bailout.

Based on my analysis, the worst fear of the pessimists, which is a bank run in the eurozone, will not materialize.

Key risks
However, there are two key risks to this forecast. First, I am assuming that the Cypriot parliament will approve the rescue package and approval isn’t fully assured. If the deal were not to be ratified, it would likely introduce a new element of risk to the eurozone banking system and possible contagion into the global banking system. In that case, all bets are all.

The second is the French elephant in the room. The French economy is negatively diverging from Germany and France needs to take steps to align itself with Germany and the core eurozone economies. While the EU can rescue Greek and Cyprus, France is at the heart of the EU and much too big to save.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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