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Does the Greek crisis spell Armageddon for your portfolio?

29 June 2015

As European markets sell off and the cash machine queues build up across Greece, we ask the experts whether investors should be nervous.

By Daniel Lanyon,

Reporter, FE Trustnet

Markets have had an ominous morning and investors could be forgiven if they start to panic that mounting pressure in Greece has considerably raised the possibility of a ‘Grexit’ and a negative outcome for their portfolios.

Following a weekend that began with the announcement that Greece will have a 5 July bailout referendum – on whether to accept a deal offered by international creditors – and ended with long queues at Greek banks, closures of branches across the country and capital controls, investors have been jettisoning stocks and bonds.

The FTSE 100 fell by more than 2 per cent with every stock but a few mining names taking a plunge. Worst affected was travel group TUI and airline IAG, where the connection to the crisis is more overt than most. 

Most European indices have also moved sharply lower, with the euro selling off as well. In the bond markets yields on Spanish bonds are rising sharply.

European equities have been a good place to invest in 2015 – although not so much in Greece.

According to FE Analytics, the MSCI Europe ex UK index has gained 8.32 per cent, although it has been slipping south since April. In contrast MSCI Greece is down 26.33 per cent since the start of the year, following a harsh downward trend since October 2009. These figures do not include today’s slides.

However, every fund in the IA Europe ex UK sector is up since the beginning of the year, led the way by Barry Norris’ £100m Argonaut European Enhanced Income fund which has returned 17.95 per cent.

Performance of sectors and indices in 2015


Source: FE Analytics

Nonetheless, it is certainly not looking good for anyone with a stake in markets, at least in the near term, but should you be selling out? Could there be further pain for your portfolio along the way? Here’s what the experts think.

 

Julius Baer: “It is no Lehman moment, no meltdown in bonds or stocks”

Burkhard Varnholt, Julius Baer’s chief investment officer, says investors should not panic but consider buying into any dips in European equities.

“While we agree with market expectations that a default of Greece on its obligations to the International Monetary Fund tomorrow is close to a 100 per cent probability, we do not think that such a non-payment would cause a meltdown in bond or stock markets for three reasons,” he said.

“First, such an event is being highly anticipated. Second, almost all Greek government bonds are owned by public institutions, which will neither panic nor default themselves. Third, sadly enough, Greece really does not produce more than 2 per cent of European gross domestic product and will thus not become a ‘Lehman moment’.


 

“Notwithstanding the above, we consider the likelihood of a Grexit extremely low, even though the diplomatic and political fallout has made all participants angry and thus created risk of irrational outcomes. We would view market movements pricing in a breakup of the currency union as a mispricing that would create new investment opportunities.”

“However, for anyone wishing to bet on or hedge against a Grexit, we would point to 30-year Swiss, German or US treasury bonds as a natural safe haven in such a scenario. On a more general note, one would expect a strong flight to quality − which is an innate quality of most of our bond and stock holdings.”

 

Brewin Dolphin: “We cannot take the creditors’ claims that contagion will be contained at face value”

Guy Foster, head of research at Brewin Dolphin, believes the referendum will be critical in signposting the potential market fallout if Greece leaves the eurozone and advises caution.

“We cannot take the creditors’ claims that contagion will be contained at face value. Rather these statements were made to strengthen their negotiating positions. That said, there clearly will have been far more thought put into the potential implications of a Greek exit and default than there had been in advance of Lehman Brothers demise,” he said.

“Most of the quantifiable burden falls on public sector creditors such as the IMF and ECB. Beyond that, national governments have exposure through the first and second bailout loans. The recovery value of these loans clearly falls if Greece leaves the eurozone and so the incentive remains for governments to find a way to keep them in.”

“The contagious implications are that any creditors to euro denominated cross border loans will be sweating now. German banks have some $13bn of cross border exposure to Greece, with US and UK banks holding similar amounts. Some of this will be secured on euro cash flows so the exposure looks limited overall – particularly in the context of Lehman Brothers nearly $800bn debts. The economy is stronger and the banking system than those dark days.”

 

The Share Centre: “Investors may see increasing market volatility this week”

Graham Spooner (pictured), investment research analyst at The Share Centre, says investors should expect to see short-term uncertainty and an increasing amount of volatility in the European markets this week.

“Although this has been a long time coming, the markets will still be affected and savvy shorter term investors will keep a close eye to see whether they wish to take advantage of the volatility. Longer term investors are unlikely to be panicked by the situation, but should be aware that markets could be entering unchartered waters,” he said.

“The greater concern may be over the possibility of contagion into other countries. As ever the attractions of a diversified portfolio stand out as a beacon of light.”


Barclays Capital
:We have not altered … our recommended overweight position on the Europe ex-UK region.


The investment team at Barclays Capital say it is not shifting away from an expectation that European stocks markets have further to rally.

“We think that the current crisis – whatever the outcome – will probably not damage the longer-term prospects for European equities,” the group’s analysts said.


“Since the onset of ECB QE, European equities have de-coupled from developments in the Greek stock market, while within the European market, so have the banks.”

“While these patterns may see a near-term reversal, we think the fundamental support coming from the euro area’s ongoing economic recovery should ultimately dominate.”

“Greece remains an outlier in this respect, and so the contagion effects of a Greek exit may not last long – provided the euro area economy continues its recovery path.”

 

 

JP Morgan Asset Management: “Investors don't need to predict what will happen in the vote. They do need to decide how much to care”

 

Stephanie Flanders, chief market strategist for Europe at JP Morgan Asset Management, says the bulk of the short-term damage from a Grexit would be felt within Greece itself.

“In the short term, it’s easy to see why markets have so far only shown sporadic bouts of concern over events in Greece,” she said.

“The long-term damage of a torrid Greek exit could be very significant indeed – politically and financially. The risk premium on eurozone assets, in times of trouble, will be that much higher and the room for manoeuvre in handling future crises will be that much smaller.”

“Investors with minimal exposure to Greek assets and confidence in the ECB’s new tool-kit would be tempted to consider it a non-event.”

“The European financial system now has much less exposure to Greece than in 2011 and 2012. It is also better equipped to deal with contagion to other countries – and so are the countries themselves.”

“Last month’s very supportive judgment from the European Court of Justice gives the ECB ample scope to intervene in bond markets to push those borrowing costs back down, should that be necessary.”

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