The near financial collapse of Greece raises serious questions about the eurozone’s future. Lindsay Vincent finds Neptune’s Rob Burnett unfazed but cautious.

The unsustainable can sometimes be sustained for a long time. When reality takes over the payback will be as severe and painful as it was in the aftermath of the global banking crisis. Will reality also prove fatal for the euro?

The crisis facing Greece and the shadows of concern spreading over Portugal, Spain and possibly Ireland and Italy, bring satisfaction to those who maintained at the outset that the euro was a flawed concept that would face its day of reckoning.

Germany, by masterminding the plan to step in with loan support for Greece should credit markets step out, may have steered the insolvent country away from the cliff edge, but this is just round one of a fight that could prove deadly. If Greece is to meet the three-year deadline to implement the financial discipline demanded of euro members, it will face depression and possible deflation. There is trouble ahead, and not only in labour markets.

Rob Burnett, head of European equities at Neptune and manager of the highly rated Neptune European Opportunities fund, does not necessarily accept that the euro is a flawed concept and welcomes this wall of worry. He says: ‘The more people who worry about the stability of the euro the better because it has caused the currency to weaken. At one stage it was €1.50 to the US dollar. Completely crackers. Far too high, far too strong. The Greek crisis has brought it down and it ought to go even lower.’

However, Burnett does accept that the euro’s future is in the balance and the problem will ‘blow wide open’ if Spain also finds itself struggling with debt and deficit realities. ‘Our best view on Spain is that the problem is now just simmering. If it boils over it will become serious and test the viability of the euro,’ he says.

Spain has a much bigger economy than Greece and a debt crisis there would represent a proportionately larger challenge to ‘whatever body [the International Monetary Fund or the European Central Bank] steps in to try to get the country out of the mire’, he says. Significantly, Burnett puts the chances of a ‘blow up’ within the next 12 to 24 months at 50:50. However, he adds: ‘Spain and Portugal are not as badly positioned as Greece.’

Burnett is therefore monitoring bond markets like never before. ‘It is hard to put a finger on any catalyst’ that caused the sudden collapse of confidence in Greece’s debt refinancing. The country’s problems have been acknowledged for a long time. ‘Who knows what the next trigger might be,’ he says.

The composition of Burnett’s portfolios mirrors the north/south divide in the eurozone. Burnett holds no equities in Spain, Portugal or Greece, not because of euro worries but because of the poor outlook for these economies. However, what concerns Burnett is the growth outlook in Europe’s main economies. He says: ‘Our expectation is that it is going to be quite difficult to create jobs on a sustainable basis.’ The patient has had a heart attack and people should not treat the marked rebound in equities as a sign that things are returning to normal.

Burnett adds: ‘We are still in a government-sponsored recovery. Inventories were run right down and are now being rebuilt. Our analysis is that you need 2 per cent growth to create employment and we just do not see the conditions for the next round of job creation. With less government support, it is hard to see where economic expansion will come from.

‘That is our major concern. But there are still good equity opportunities. There is decent momentum in the economy for the short term, and GDP data will look better in the second quarter of this year. Some stocks are still undervalued, so it is not all doom and gloom.

‘But sometime in 2010 the markets are going to start focusing on the negatives for the economy in 2011-12. The prospects are not great. Data in the next three or four months will provide support, but we are preparing for markets to be less well supported than now.’

Burnett leads a team of 22. ‘We do our own research and analysis, and produce our own ideas,’ he says. Neptune’s top managers double as sector specialists and Burnett’s pitch is financials. Company visits are exceptional. Corporate contact is made in Neptune’s London offices or at conferences.

In the first stage of stock selection, Neptune’s in-house economist provides the macro view of the world and specialists then offer top-down views on their sectors. ‘It is then a matter of bottom up stock selection,’ he explains. ‘Every stock we buy has a target price, and we have a stop-loss system – a 10 per cent underperformance can trigger a sale – so portfolio turnover can be high. Last year, it was 200 per cent.

‘We began 2009 in a deflationary crisis and by February people were more optimistic. So from having no banks, we then bought a lot of banks. By the fourth quarter banks were getting overpriced. To beat the index you had to be active and we swung the portfolio aggressively. If you had sat on your hands you would have been carried out.’

 Burnett is particularly positive about prospects for European telecommunication companies. ‘More and more people are using smartphones and there is a bit of pricing power returning to the operators. Yields are as high as 8 per cent, and the equivalent of 25 per cent of Deutsche Telekom’s market capitalisation will be returned in dividends in the next three years. This is a tremendous return.’

He is also focusing on defensive companies such as Unilever, Danone and Nestlé as well as food retailers. He says: ‘These provide good, secure growth no matter what goes down. There are choppy waters ahead and these are the kind of companies we want on board.’

Many fund managers search for ‘special situations’ and Burnett believes advertising companies now present such an opportunity. He says: ‘Advertising agencies are now beginning to harvest the potential of the web. Global companies have good balance sheets and there is going to be a good ad spend from Ford, Nestlé and so on. Parts of the retail sector are also interesting: Inditex: the Zara brand, and H&M are close to good value.’

Neptune expects China’s rate of growth to slow, and Burnett has responded by going underweight in aluminium, steel and chemicals companies. But the firm does not share the inflationary fears being expressed elsewhere. Burnett says: ‘Despite massive support from governments the total amount of money has not risen much. A lot of money was taken out of the money supply because of the crisis. Excess productive and labour capacity are not the conditions for inflation.’

Of more immediate concern is pressure on China to revalue its currency. ‘The biggest effect on Europe’s economy will be what China will do with its currency. By holding it down, the Chinese have seriously inhibited Europe’s position as a global exporter,’ he says.

Burnett adds that the US will have a bearing on fierce global pressure for wholesale banking system reform. ‘The regulatory risk is stronger than the market is discounting. Now, banking profitability will be OK but not great. It will be back to what it was in 1992-93.’ In other words, it’s payback time.