Louis Gargour

Italian yields, which hit euro-era highs above 6 percent this week on fears of contagion from Greece, could touch those levels again in the next two weeks if a European deal on a second Greek bailout doesn't solve the problem.

A lot of people are focusing on Italy and unless ... the European governments do something very decisive today we're going to see Italy go a lot wider before the situation improves.

We believe peripheral sovereigns will exhibit further volatility, particularly Italy and Spain. I recommend a prudent approach with continued underweights and shorts in the peripheral countries.

We began by looking at Italian banks, and when we looked more closely we realised the absorption of losses across peripheral European banks could be a problem.

Subordinated debt is where we believe the impact of the peripheral sovereign write-downs will have the best risk reward for investors wishing to be short.

Investors should focus on relative value bets, where a fund is long one bond or sector and short another, rather than on market direction, as Europe's debt crisis rages.

Investors should be market neutral -- and should seek dispersion and convergence trades.

With a long-short approach we have the opportunity to look at volatility as an opportunity to make money.

There will be companies with decent balance sheets and pan-European operations that have cheapened substantially as a result of the sovereign situation. These are unique opportunities to invest in investment grade companies at high yield returns.