A break-up of the euro zone involving major economies is not likely, and a slowdown in the region as well as a deleveraging in European banks is unlikely to derail Asia's growth, a star fund manager at Franklin Templeton said.
Recent moves by European leaders to establish a stronger fiscal union in the region, coupled with unprecedented steps by the European Central Bank (ECB) to provide liquidity, should help secure the future of the euro zone, Michael Hasenstab said in a commentary on the firm's website.
Hasentab is portfolio manager of the around $57 billion Templeton Global Bond Fund, which has long beaten peers but saw a rare off year when its returns fell 2.4% in 2011.
"The far more probable scenario of painful deleveraging by European banks and weak European growth, while a serious setback for Europe, will likely have far more modest and manageable global spillovers than the current markets are assuming," he said.
Global markets took a hit in the latter half of last year, hurt by slow progress in resolving the euro zone's debt crisis and worries the monetary union may be headed for a break up.
Assets have clawed back some ground early in 2012, though investors remain wary of further deterioration in the euro zone crisis. Talks to restructure Greece's debt in order to avoid a chaotic default hit a snag on Tuesday.
A new capital requirement ratio for European banks to comply with by June will see them deleveraging, Hasenstab noted, but he does not expect this to have a large impact on Asia.
"Shutting down all business lines in emerging markets would leave these banks without this important source of profits and force an even greater reliance on a weak domestic banking market in Europe," Hasenstab said.
Meanwhile, the ECB's move to pump more liquidity into the financial system will also lead to further capital inflows into Asian markets, whose strong economic fundamentals and undervalued currencies make them attractive, Hasenstab said.
The European Central Bank pumped 489 billion euros into the financial system in December in its first-ever offering of three-year loans, to help banks' funding strains amid the European sovereign debt crisis.
"A European recession, especially if deeper and more protracted, would dampen world trade, including Asian exports; but nothing on the scale seen in 2008," Hasenstab said.
The fund manager and his team at Franklin Templeton manages $145 billion in global bonds.
